Question

NutraLabs, Inc. leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. NutraLabs manufactured the machine at a cost of $5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. NutraLabs' implicit interest rate is 12%. Required: 1. Determine the price at which NutraLabs is "selling" the equipment (present value of the lease payments) at September 30, 2018 (to the nearest $000). 2. What pretax amounts related to the lease would NutraLabs report in its balance sheet at December 31, 2018? 3. What pretax amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2018? 4. What pretax amounts related to the lease would NutraLabs report in its statement of cash flows for the year ended December 31, 2018?

Answer 1

Answer 1)

Determine the present value of lease payment at September 30, 2018.

use the present value factor 15.3238 (Present value of an annuity of $1 for 20 period @ 3% rate)

Present Value (initial balance) = 391,548 * 15.3238 = $6,000,000(rounded)

Answer 2)

Compute the amount that would report in the balance sheet at 31st December 2018 for the lease.

Particulars	Amount
Initial balance of lease September 30,2018	6,000,000
September 30, 2018 Reduction	-391,548
December 31, 2018 Reduction	-223,294
Net Receivable at December 31, 2018	5,385,158
hence Nutralabs will report $ 5,384,158 as Net Receivable at December 31, 2018

Computation of lease reduction on 31st Dec'18

Step a) Compute the interest revenue on lease = 3%(6000000-391548)

Interest Revenue = $168,254

Step b) compute the lease receivable on 31st Dec'18

Lease receivable = Lease amount - interest receiable

Lease receivable = 391,548 -168,254

Lease Receivable = $223,294

Answer 3

Compute the amount that Nutralabs will report in income statement for the year ended 31st December 2018 for the lease

Particulars	Amount
Sales Revenue	6,000,000
Less : Cost of goods Sold	5,000,000
Gross Profit	1,000,000
Interest Revenue
Interest Revenue September 30, 2018	0
Interest Revenue December 31, 2018	168,254

Hence Nutralabs will report gross profits $1,000,000 and Interest revenue $168,254 for the year ended 31st Dec'18.

Answer 4)

The sale type lease amounted to $6,000,000 is reported as non cash activity in the disclosure note of financial statement.

The quarterly lease amount for the two quarter (sep and dec) of $783,096 that is 391,548 multiply by 2 for two quarter, is reported in the operating activity in cash flow statement.

The interest amounted $ 168,254 is reported in operating activity of cash flow statement as operating revenue.

The principal amount of $614,842(391,548+ 223,294) is also reported in cash flow as operating activity.