Question

Problem 15-29 (Algo) Sales-type lease; lessor; financial statement effects (LO15-2, 15-8] Abbott Equipment leased a protein analyzer to Werner Chemical, Inc., on September 30, 2021. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6.5 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $459,886, payable each September 30, December 31, March 31, and June 30, with the first payment at September 30, 2021. Abbott's implicit interest rate is 16%. 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. What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2021? 2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2021? 3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2021? Complete this question by entering your answers in the tabs below. Req 1 and 2 Reg 3 What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2021 and income statement for the year ended December 31, 2021? (Enter your answer in whole dollars. Round your intermediate and final answers to nearest whole dollar.) 1. Lease receivable 2. Interest revenue

Answer 1

Solution:

A lease contract is a written agreement between two parties that identifies the terms of the lease as well as the leased property. The leased property’s owner is called the lessor and the company renting the property is considered the lessee. A business lease for a building or equipment is not much different than a personal lease for an apartment.

Compute the amount that should report on the balance sheet at December 31, 2021, for the lease:

Asset Side of the Balance Sheet at December 31, 2021:

Receivable

Initial Balance of Lease on September 2021 = $6493590

September 30, 2021 Reduction     = ($459886)

December 31, 2021 Reduction     = ($218538)

Liability at December 31, 2021 = $5815166

Working Note

Calculation Of Initial Balance of Lease on September 2021

The present value of Lease Payment= (lease payment x Present value of an annuity)

= ($459886 x 14.12)

= $6493590

Therefore, the initial balance of an annuity due is $6493590.

Compute the lease reduction on December 31, 2021

Step 1: Compute the interest expense of lease on December 31, 2021:

Interest= 4% ($6493590 - $459886)

= 4% x $6033704

= $241348

Compute the lease payable on December 31, 2021 (December 31, 2021 Reduction):

Quaterly Lease Payment - Interest Expense

$459886 - $241348

$218538

Requirement 2:
Compute the amount that should report on the income statement for the year ended December 31, 2021, for the Lease

Interest Revenue for the year ended December 31, 2016

Interest September 30, 2021 = 0

Interest December 31, 2021, = $241348

Interest Revenue =  $241348