Question

Abbott Equipment leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. Abbott purchased the machine from NutraLabs, Inc., at a cost of $5.1 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $332,816, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Abbot's implicit interest rate is 8%. (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 Abbott report in its balance sheet at December 31, 2018?
2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2018?
3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2018?

Answer 1

1)
Present value of lease payments = $332,816 x PVAD(2%,20)	$5,550,871.66
Initial balance, September 30, 2018	$5,550,871.66
Less: Sept. 30, 2018 reduction	$   332,816.00
Less: Dec. 31, 2018 reduction  ($332,816 - ((5550871.66 - $332,816) x 2%)	$228,454.89
December 31, 2018 net liability	$4,989,600.77
Asset at December 31, 2018
Initial balance, September 30, 2018	$5,550,871.66
Less: Accumulated depreciation at Dec. 31, 2018(($5550871.66 ÷  5 years x ¼ year)	$277,543.58
December 31, 2018 Net Assets	$5,273,328.07
3)
Expenses for year ended December 31, 2018
Sept. 30, 2018 interest expense	0
Dec. 31, 2018 interest expense (5550871.66 - $332,816) x 2%)	$104,361.11
Interest expense for 2018	$104,361.11
Depreciation expense for 2018 (calculated above)	$277,543.58
Total expenses	$381,904.70
4)
Abott would report the $5,550,871.66 investment in the protein analyzer and its financing with a capital lease as a significant noncash investing and financing activity in the disclosure notes to the financial statements.