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 $486,269 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 $3.3. (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

Solution 1:

Semiannual lease payment = $486,269

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 10%, 5% semiannual

Present value of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 5%

= $486,269 * 6.786373 = $3,300,000

Solution 2:

Semiannual payment on 30.06.2018 = $486,269

Pretax amount of liability on 30.06.2018 = ($3,300,000 - $486,269) = $2,813,731

Interest expense for 31.12.2018 = $2,813,731 * 5% = $140,687

Semiannual lease payment on 31.12.2018 = $486,269

Pre tax amount for liability December 31, 2018 = $2,813,731 + $140,687 - $486,269 = $2,468,149

Depreciation on right to use assets for 2018 = $3,300,000 / 4 * 6/12 = $412,500

Pre tax amount of right to use asset to be reported for 2018 = $3,300,000 - $412,500 = $2,887,500

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $2,813,731 * 5% = $140,687

Pre tax amount of Depreciation expenses Georgia Atlantic Inc. reports in its income statement = $3,300,000 / 4 * 6/12 = $412,500