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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 $512,709 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 12.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.5 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 is complete but not entirely correct. Present value Pretax net receivable Total pretax effect on net income 4,000,002 3,183,822 709,240 Ⓡ 3.

Answer 1

Solution 1:

Semiannual lease payment to be received = $512,709

Total semiannual payments to be received = 5*2 = 10

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 10 periods at 6%

= $512,709 * 7.80169 = $3,999,997

Solution 2:

Semiannual payment received on 30.06.2021 = $512,709

Pretax amount of liability on 30.06.2021 = ($3,999,997 - $512,709) = $3,487,288

Interest revenue for 31.12.2021 = $3,487,288 * 6% = $209,237

Semiannual lease payment received on 31.12.2021 = $512,709

Pre tax amount for receivables on December 31, 2021 = $3,487,288 + $209,237 - $512,709 = $3,183,816

Solution 3:

Pre tax amount of interest Revenue Builder Inc. reports in its income statement = $3,487,288 * 6% = $209,237

Pre tax amount of revenue Builder Inc. reports in its income statement = $3,999,997

Pre tax amount of cost of goods sold to be reported by Builder Inc. in its income statement = $3,500,000

Pretax amounts related to the lease would Builders report in its income statement for the year ended December 31, 2021 = $209,237 + $3,999,997 - $3,500,000 = $709,234