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 $385,024, 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?
1 | |
Present Value of Annuity due of $1 [PV(4%,19,-1,0,0)+1] | 14.13394 |
Present value of the lease payments ($385,024 * 14.13394) | |
$ 5,441,906 | |
2 | |
Initial balance, September 30, 2018 | $ 5,441,906 |
Sept. 30, 2018 reduction | $ 385,024 |
Dec. 31, 2018 reduction (385024-(5441906*4%)) | $ 167,348 |
December 31, 2018 Net Liability | $ 4,889,534 |
Asset at December 31, 2018 | |
Initial balance, September 30, 2018 | $ 5,441,906 |
Amortization at Dec. 31, 2018 (5441906/20) | $ 272,095 |
December 31, 2018 Net Assets | $ 5,169,811 |
3 | |
Expenses for year ended December 31, 2018 | |
Sept. 30, 2018 interest expense | $0 |
Dec. 31, 2018 interest expense | $ 217,676 |
Interest expense for 2018 | $ 217,676 |
Amortization expense for 2018 | $ 272,095 |
Total expenses | $ 489,772 |
4 | |
Cash Outflows from Operating Activities | $ 217,676 |
Cash Outflows from Financing Activities (385024+167348) | $ 552,372 |
Total Lease Payments | $ 770,048 |
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