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 $486,146 over a 4-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 120%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $27 million. (FV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of S1 and PVAD of S1) (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) 1 Present value Amount to be reported in the balance sheet Amount to be reported in the income statement 3.

Answer 1

Solution 1: Semiannual lease payment to be received = $486,146 Total semiannual payments to be received = 4*2 = 8 Incremental borrowing rate = 12%, 6% semiannual Price at which Builders is “selling” the equipment = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 6% = $486,146 * 6.5824 = $3,200,007 Solution 2: Semiannual payment received on 30.06.2021 = $486,146 Pretax amount of liability on 30.06.2021 = ($3,200,007 - $486146) = $2,713,861 Interest revenue for 31.12.2021 = $2,713,861 * 6% = $168,832 Semiannual lease payment received on 31.12.2021 = $486146 Pre tax amount for receivables on December 31, 2021 = $2,713,861 + $168,832 - $486,146= $2,058,883 Solution 3: Pre tax amount of interest Revenue Builder Inc. reports in its income statement = $3,200,007 * 6%= $168,832 Pre tax amount of revenue Builder Inc. reports in its income statement = $3,200,007 Pre tax amount of cost of goods sold to be reported by Builder Inc. in its income statement = $2,700,000 Pretax amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 = $168,832 + $3,200,007-$2,700,000 = $668,839