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 $414,386, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Werner's incremental borrowing rate is 16%. 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?
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 $414,386, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Werner's incremental borrowing rate is 16%. 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. EVA 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 What pretax amounts related to the lease would Werner report in its statement of cash flows for the year ended December 31, 2018? (Round your intermediate and final answers to nearest whole dollar.) Capital lease Interest portion Principal portion

Answer 1

Answer 1)

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

use the present value factor 14.1339 (Present value of an annuity of $1 for 20 period @ 4% rate)

Present Value (initial balance) = $414,386*14.1339 = $5,856,890

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	$ 58,56,890.00
September 30, 2018 Reduction	$   4,14,386.00
December 31, 2018 Reduction	$   1,96,685.84
Net Receivable at December 31, 2018	$ 52,45,818.16
hence Werner Chemical 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 = 4%(5,856,890-414,386)
Interest Revenue = $217,700
Step b) compute the lease receivable on 31st Dec'18
Lease receivable = Lease amount - interest receiable
Lease receivable = 414,386 - 217,700
Lease Receivable = $196,686

Answer 3
Compute the amount that Werner Chemical will report in income statement for the year ended 31st December 2018 for the lease
Particulars	Amount
Sales Revenue	58,56,890
Less : Cost of goods Sold	50,00,000
Gross Profit	8,56,890
Interest Revenue
Interest Revenue September 30, 2018	0
Interest Revenue December 31, 2018	2,17,700
Hence Werner Chemical will report gross profits $856,890 and Interest revenue $217,700 for the year ended 31st Dec'18.

Answer 4)

The sale type lease amounted to $5856890 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 $828772 that is 414386 multiply by 2 for two quarter, is reported in the operating activity in cash flow statement.

The interest amounted $ 217,700 is reported in operating activity of cash flow statement as operating revenue.

The principal amount of $611,072(414386+196686) is also reported in cash flow as operating activity.