Question

Werner Chemical, Inc., leased a protein analyzer on September 30, 2018. The five-year lease agreement calls for Werner to make quarterly lease payments of $371,970, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Werner's incremental borrowing rate is 12%. Amortization is recorded on a straightline basis at the end of each fiscal year. The useful life of the equipment is five years. (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 September 30, 2018. 2. What pretax amounts related to the lease would Werner report in its balance sheet at December 31, 2018? 3. What pretax amounts related to the lease would Werner report in its income statement for the year ended December 31, 2018? 4. What pretax amounts related to the lease would Werner report in its statement of cash flows for the year ended December 31, 2018? Complete this question by entering your answers in the tabs below. Req 1 to 3 Reg 4 Determine the present value of the lease payments at September 30, 2018. What pretax amounts related to the lease would Werner report in its balance sheet at December 31, 2018? What pretax amounts related to the lease would Werner report in its income statement for the year ended December 31, 2018? (Round your intermediate and final answers to nearest whole dollar.) Show less 1. 2. Present value Liability Asset Total expenses $ $ $ | $ 5,700,000 5,115,901 5,415,000 444,841 3.

Answer 1

1. Present value of lease payments :

Calculation of Present Value of Minimum Lease Payments
Date/Year	Installment Amount	PVF @ 3%	Present Value
Sep-18	371,970	1	371,970
Dec-18	371,970	0.970873786	361,136
Mar-19	371,970	0.942595909	350,617
Jun-19	371,970	0.915141659	340,405
Sep-19	371,970	0.888487048	330,491
Dec-19	371,970	0.862608784	320,865
Mar-20	371,970	0.837484257	311,519
Jun-20	371,970	0.813091511	302,446
Sep-20	371,970	0.789409234	293,637
Dec-20	371,970	0.766416732	285,084
Mar-21	371,970	0.744093915	276,781
Jun-21	371,970	0.722421277	268,719
Sep-21	371,970	0.70137988	260,892
Dec-21	371,970	0.68095134	253,293
Mar-22	371,970	0.661117806	245,916
Jun-22	371,970	0.641861947	238,753
Sep-22	371,970	0.623166939	231,799
Dec-22	371,970	0.605016446	225,048
Mar-23	371,970	0.587394608	218,493
Jun-23	371,970	0.570286027	212,129
		TOTAL	5,699,994
		OR ROUNDED OFF -	5,700,000

2. Values on Balance sheet as on December 31, 2018
Right of use Asset :
Value as on September 30, 2018 = 57,00,000
Less : Depreciation for 3 months = (57,00,000/5)*(3/12) = 285,000
Value of Right of use asset appearing in balance sheet as on December 31, 2018 = 57,00,000 - 285,000 = 54,15,000
Lease Liability :
S. No.	Value as on September 30	Interest as per EIM method	Installment Paid	Balance as on December 31, 2018
1	5,700,000	171,000	743,940	5,127,060
Following values will appear on balance sheet :
Asset	5,415,000
Liability	5,127,060
3. Income statement
Total expenses to be reported in income statement :
Depreciation	285,000
Interest on lease liability	171,000
Total expenses	456,000
4. Cash flow impact :
Particulars	Amount	Cash flow - impact
Interest Portion	171,000	Cash outflow from operating activity
Principal Portion	743,940	Cash outflow from financing activity	(This includes installments paid on September 30 and December 30