Question

On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $604,355 over a 5-year lease term (also the asset's useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia- Atlantic's incremental borrowing rate is 10.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $4.4 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. Determine the price at which Builders is "selling" the equipment (present value of the lease payments) at June 30, 2021. 2. What amount related to the lease would Builders report in its balance sheet at December 31, 2021 (ignore taxes)? 3. What line item amounts related to the lease would Builders report in its income statement for the year ended December 31, 2021 (ignore taxes)? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to the nearest whole dollar.)

Answer 1

Part 1
Present Value of lease payments= Lease payment x PVAF @ 5% for 10 years
			604355 x 7.7217
Present Value=			4666648
Part 2
Initial Balance-Lease liability		4666648
Jun-30	Reduction	604355
Dec-31	Reduction	401240	Interest Expense		203114.7	(4666648-604355) x 5%
	Net Lease liability	3661053	Lease payment		604355
			Lease payable		401240.3	(Lease payment - interest expense)
Initial Balance - Asset		4666648
	Depreciation	466665
	Value on Dec 2021	4199983
Part 3
Expenses
Interest Expense		203114.7
Depreciation Expense		466665