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On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from IC Leasing Corporation. The lease agreement calls fo

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Answer #1

Solution 1:

Semiannual lease payment to be received = $468,683

Total semiannual payments to be received = 5*2 = 10

Incremental borrowing rate = 10%, 5% semiannual

Price at which Builders is “selling” the equipment = Semi Annual lease payments * Cumulative PV Factor of annuity due for 10 periods at 5%

= $468,683 * 7.721735 = $3,800,000

Semiannual payment received on 30.06.2021 = $468,683

Pretax amount of liability on 30.06.2021 = ($3,800,000 - $468,683) = $3,331,317

Interest revenue for 31.12.2021 = $3,331,317 * 5% = $166,566

Semiannual lease payment received on 31.12.2018 = $468,683

Pre tax amount for receivables on December 31, 2018 = $3,331,317 + $166,566 - $468,683 = $3,029,200

Solution 3:

Pre tax amount of interest Revenue Builder Inc. reports in its income statement = $3,331,317 * 5% = $166,566

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