Question

On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $677,829 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic’s incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $4.6. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.
2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018?
3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018?

Answer 1

Answer:-

1.

Calculation of the present value of lease payment

$677,829*5.32948= $3,612,476

Present Value of an annuity due of $1:n=6, i=5%

2.

Liability at December 31,2018

Particular	Amount
Initial Balance June 30, 2018	$4,600,000
June 30,2018 reduction	($677,829)
Dec.31, 2011 reduction	($481,721)
Dec.31, 2011 net liability	$3,440,450
Initial Balance June 30, 2018	$4,600,000
Acc. Depreciation at 31Dec,2018 (4600,000/4Yrs*1/2)	($575,000)
Dec.31 2011	$ 4,025,000

3. Expenses for year ended December31,2018

Particular	Amount
Acc. Depreciation at 31Dec,2018	$575,000
Interest Expenses	$196,108
Total Expenses	$771,108

Calculation

Dec.31, 2011 reduction

Interest expenses

($4,600,000-$677,829*5%) 196,108

                                                =677,829-196,108

                                               =$575,000