Question

On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $468,683 over a five-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 10%, the same rate IC used to calculate lease payment amounts. IC purchased the equipment from Builders, Inc. at a cost of $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. What pretax amount related to the lease would IC report in its balance sheet at December 31, 2021? 2. What pretax amount related to the lease would IC report in its income statement for the year ended December 31, 2021? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to the nearest whole dollar.) 1. 2. Pretax amount of net receivable Pretax amount of interest revenue

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