Question

On June 30, 2018, Blue, Inc. leased a machine from Big Leasing Corporation. The lease agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of $286,143 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Blue’s incremental borrowing rate is 8%, the same rate Big uses to calculate lease payment amounts. The lease agreement qualifies as a finance lease. Amortization is recorded on a straight-line basis at the end of each year. (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, (to the nearest $000) that Blue uses to record the right-of-use asset and lease liability. 2. What would be the amounts related to the lease that Blue would report in its balance sheet at December 31, 2018? (Ignore taxes.) 3. What would be the amounts related to the lease that Blue would report in its income statement for the year ended December 31, 2018? (Ignore taxes.) (For all requirements, round your answers to the nearest whole dollar amounts.)

Answer 1

Ans: Blue Inc. leased A machine from Big Leasing Corporation on 30 June 2018

Semiannual Lease Payment $286,143

Lease Period 3 Years

First payment date is 30 June 2018

Computation of Present value of Lease Option
Date Of Payment	Period	Lease Payment	PVF (1/(1+(0.08/2))	PV
30 June 2018	0	$286,143	1	$286,143
31. Dec. 2018	1	$286,143	0.9615	$275,138
30 June 2019	2	$286,143	0.9246	$264,555
31. Dec. 2019	3	$286,143	0.8890	$254,380
30 June 2020	4	$286,143	0.8548	$244,596
31. Dec. 2020	5	$286,143	0.8219	$235,189
				$1,560,001

2) Payment Schedule

Date Of Payment	Payment	Interest	Increase or decrease in Carrying Amount	Carrying Amount
30 June 2018	$286,143			$1,273,858
31. Dec. 2018	$286,143	$50,954	-$235,189	$1,038,669
30 June 2019	$286,143	$41,547	-$244,596	$794,073
31. Dec. 2019	$286,143	$31,763	-$254,380	$539,693
30 June 2020	$286,143	$21,588	-$264,555	$275,138
31. Dec. 2020	$286,143	$11,006	-$275,138	$0

Amount to be appear in balance sheet as on 31.Dec 2018 is $1,038,669

3) Amount that will be reported in the Income statement is $50,954 as on 31.Dec 2018