Question

Exercise 15-3 (Algo) Finance lease; lessee; balance sheet and income statement effects [LO15-2]

On June 30, 2021, Georgia-Atlantic, Inc. leased a warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $464,149 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 8%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $3.2 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 present value of the lease payments at June 30, 2021 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, 2021?
3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2021?
(For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to the nearest whole dollar.)

1. Present value 2. Pretax amount for liability Pretax amount for right-of-use asset 3. Pretax amount for interest expense Pretax amount for amortization expense

Answer 1

Solution 1:

Semiannual lease payment = $464,149

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 8%, 4% 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 4%

= $464,149 * 7.00205 = $3,249,995

Solution 2:

Semiannual payment on 30.06.2021 = $464,149

Pretax amount of liability on 30.06.2021 = ($3,249,995 - $464,149) = $2,785,846

Interest expense for 31.12.2021 = $2,785,846 * 4% = $111,434

Semiannual lease payment on 31.12.2021 = $464,149

Pre tax amount for liability December 31, 2021 = $2,785,846 + $111,434 - $464,149 = $2,433,131

Depreciation on right to use assets for 2021 = $3,249,995 / 4 * 6/12 = $406,249

Pre tax amount of right to use asset to be reported for 2021 = $3,249,995 - $406,249 = $2,843,746

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $2,785,846 * 4% = $111,434

Pre tax amoun of amortization expenses Georgia Atlantic Inc. reports in its income statement = $3,249,995 / 4 * 6/12 = $406,249