Solution 1:
Semiannual lease payment to be received = $604,152
Total semiannual payments to be received = 4*2 = 8
Incremental borrowing rate = 10%, 5% semiannual
Price at which Builders is “selling” the equipment = Semi Annual
lease payments * Cumulative PV Factor of annuity due for 8 periods
at 5%
= $604152 * 6.78637 = $4,100,000
Solution 2:
Semiannual payment received on 30.06.2021 = $604,152
Pretax amount of liability on 30.06.2021 = ($4,100,000 - $604,152)
= $3,495,848
Interest revenue for 31.12.2021 = $3,495,848 * 5% = $174,792
Semiannual lease payment received on 31.12.2021 = $604,152
Pre tax amount for receivables on December 31, 2021 = $3,495,848 +
$174,792 - $604,152 = $3,066,488
Solution 3:
Pre tax amount of interest Revenue Builder Inc. reports
in its income statement = $3,495,848 * 5% = $174,792
Pre tax amount of revenue Builder Inc. reports in its
income statement = $4,100,000
Pre tax amount of cost of goods sold to be reported by Builder Inc.
in its income statement = $3,600,000
Pretax amounts related to the lease would Builders report in its
income statement for the year ended December 31, 2018 = $174,792 +
$4,100,000 - $3,600,000 = $674,792
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