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 $880,440 over
a 3-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 8.0%, the same
rate Builders used to calculate lease payment amounts. Builders
manufactured the equipment at a cost of $4.3 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.)
Solution 1:
Semiannual lease payment to be received = $880,440
Total semiannual payments to be received = 3*2 = 6
Incremental borrowing rate = 8%, 4% semiannual
Price at which Builders is “selling” the equipment = Semi Annual lease payments * Cumulative PV Factor of annuity due for 6 periods at 4%
= $880,440 * 5.45182 = $4,800,000
Solution 2:
Semiannual payment received on 30.06.2021 = $880,440
Pretax amount of liability on 30.06.2021 = ($4,800,000 - $880,440) = $3,919,560
Interest revenue for 31.12.2021 = $3,919,560 * 4% = $156,782
Semiannual lease payment received on 31.12.2021 = $880,440
Pre tax amount for receivables on December 31, 2021 = $3,919,560 + $156,782 - $880,440 = $3,195,902
Solution 3:
Pre tax amount of interest Revenue Builder Inc. reports in its income statement = $3,919,560 * 4% = $156,782
Pre tax amount of revenue Builder Inc. reports in its income statement = $4,800,000
Pre tax amount of cost of goods sold to be reported by Builder Inc. in its income statement = $4,300,000
Pretax amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 = $156,782 + $4,800,000 - $4,300,000 = $656,782
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