On June 30, 2021, Georgia-Atlantic, Inc. leased a warehouse
equipment from IC Leasing Corporation. The lease agreement calls
for Georgia-Atlantic to make semiannual lease payments of $583,375
over a four-year lease term, payable each June 30 and December 31,
with the first payment at June 30, 2021. Georgia-Atlantic's
incremental borrowing rate is 12%, the same rate IC uses to
calculate lease payment amounts. Amortization is recorded on a
straight-line basis at the end of each fiscal year. The fair value
of the equipment is $3.8 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 present value of the lease
payments at June 30, 2021 that Georgia-Atlantic uses to record the
right-of-use asset and lease liability.
2. What pretax amounts related to the lease would
Georgia-Atlantic report in its balance sheet at December 31,
2021?
3. What pretax amounts related to the lease would
Georgia-Atlantic report in its income statement for the year ended
December 31, 2021?
Solution 1:
Semiannual lease payment = $583,375
Total semiannual payments = 4*2 = 8
Incremental borrowing rate = 12%, 6% semiannual
Present value of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 6%
= $583,375 * 6.58238 = $3,839,996
Solution 2:
Semiannual payment on 30.06.2021 = $583,375
Pretax amount of liability on 30.06.2021 = ($3,839,996 - $583,375) = $3,256,621
Interest expense for 31.12.2021 = $3,256,621 * 6% = $195,397
Semiannual lease payment on 31.12.2021 = $583,375
Pre tax amount for liability December 31, 2021 = $3,256,621 + $195,397 - $583,375 = $2,868,643
Depreciation on right to use assets for 2021 = $3,839,996 / 4 * 6/12 = $480,000
Pre tax amount of right to use asset to be reported for 2021 = $3,839,996 - $480,000 = $3,359,996
Solution 3:
Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $3,256,621 * 6% = $195,397
Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement = $3,839,996 / 4 * 6/12 = $480,000
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