Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $779,224 over a three-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 9%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc.. at a cost of $4.2 million. (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. What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2018?

2. What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2018? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to nearest whole dollar.)

Answer 1

Solution

1. Determination of pretax amounts related to the lease IC would report in its balance sheet at Dec 31, 2018:

Lease receivable at Dec 31, 2018

Initial balance$4,200,000

Less: June 30, 2018 reduction-$779,224

Less: Dec 31, 2018 reduction-$625,289

Dec 31, 2018 lease receivable$2,795,487

June 30, 2018

Present value of Lease payments = $779,224 x present value of an annuity due, I = 9% x ½ = 4.5%; n = 6

Present value of lease payments = $779224 x 5.38998 = $4,200,000 (rounded)

Lease receivable at June 30, 2018$4,200,000

Payment on June 30, 2018$779,224

• Dec 31, 2018

Interest revenue = ($4,200,000 - $779224) x 9% x 6/12 = $153,935

Lease receivable = $779,224 - $153,935 = $625,289

1. Determination of the pretax amounts related to the lease that IC would report in its income statement for the year ended Dec 31, 2018:

Interest revenue, June 30, 2018 $0

Interest revenue, Dec 31, 2018 $153,935

Interest revenue for 2018$153,935

No income effect of the cost and sales revenue as cost and sales revenue at same at $4,200,000.

Hence, pretax amount related to lease for the year ended Dec 31, 2018 = $153,935