Question

Abbott Equipment leased a protein analyzer to Werner Chemical, Inc. on September 30, 2018. Abbott purchased the machine from NutraLabs, Inc., at a cost of $6.4 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $417,651, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Abbot's implicit interest rate is 12%. (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, 2018? 2. What pretax amounts related to the lease would Abbott report in its income statement for the year ended December 31, 2018? 3. What pretax amounts related to the lease would Abbott report in its statement of cash flows for the year ended December 31, 2018? Complete this question by entering your answers in the tabs below. Req 1 and 2 Req3 What pretax amounts related to the lease would Abbott report in its balance sheet at December 31, 2018 and income statement for the year ended December 31, 2018? (Enter your answer in whole dollars. Round your intermediate and final answers to nearest whole dollar.) 1. Lease receivable 2. Interest revenue

Answer 1

1	Present value of Minimum lease payments:
						$
	Quarterly lease payments					417651
	Present value @ 3% For 20 years *					15.3238
	Present value of Minimum lease payments					6400000
	*
	Implicit interest rate=12%
	Lease is payable Quarterly, Interest per lease period=12*1/4=3%
	Total quarterly period=5 years*4 quarter periods per year=20 Quarter periods
	lease is payable at the beginning of the period
	Hence, while computing present value,PV factor for the first period will be 1.
	For the next period will be PV factor for first year
	For the next period will be PV factor for second year and so on
	Lease receivable=Present value of minimum lease payment=$ 6400000
2	First lease payment is made on Sep 30. ie, at the inception of lease.
	Hence, the entire lease payment will be towards principal
	Second lease payment is on Dec 31,2018
	On Dec 31, Amount of lease outstanding:
						$
	Beginning balance					6400000
	Less: lease payment towards principal
	(Since lease rental is paid at the beginning,
	whole payment is towards principal)					417651
	Lease outstanding					5982349
	Interest revenue=5982349*3%=179470.5=$ 179471
3	Principal repayment
						$
	Sep 30.					417651
	Dec 31.	(Lease rental-Interest component)
		(417651-179471)				238180
	Total					655831
				$
	Finance lease:
	Interest portion			179471
	Principal portion			655831