Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $880,440 over a 3-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Georgia-Atlantic's incremental borrowing rate is 8.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $4.3 million. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.
2. What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?
3. What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?

Answer 1

1	Calculation of the present value of lease payments ("selling price")
	n= 6, i= 4%
	5.45182
	880,440*5.45182
	4800000
2	Receivable at December 31, 2018
	Initial balance, June 30, 2018	4800000
	June 30, 2018 reduction	880440
	Dec. 31, 2018 reduction 880440-(4800000-880440)*4%	723658
	December 31, 2018 receivable	3195903
3	Income effect for year ended December 31, 2018
	June 30, 2018 interest revenue	0
	Dec. 31, 2018 interest revenue (4800000-880440)*4%	156782
	Interest revenue for 2018	156782
	Sales revenue*	4800000
	Cost of goods sold*	4300000
	Income effect	656783

Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.

4800000

What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?

3195903

What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?

656783