Question

Exercise 15-3 Finance lease; lessee; balance sheet and income statement effects (LO15-2] On June 30, 2018, Georgia Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia Atlantic to make semiannual lease payments of $562.907 over a three-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 10%, the same rate IC uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $3 million. (FV of $1. PV of $1. EVA of S1. PVA of $1. EVAD of S1 and PVAD of S1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and lease liability. 2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018? 3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018? (For all requirements, Enter your answers in whole dollars and not in millions. Round your final answers to nearest whole dollor.) Answer is not complete. 1 $ 3,000,000 $ 1,996 041 2 Present value Pretax amount for hability Pretax amount for night-of-use asset Pretax amount for interest expense Protax amount for amortization 3 $ 121,855

Answer 1

Solution 1
Presnet Value of Lease payments
Total Semiannual Periods (3*2)	6
Incremental Borrowing Rate (10%/2)	5%
Semi-annual lease payment	562907
*cumulative PV factor for annuity due at 5% for 6 periods	5.329477
Presnet Value of Lease payments	3000000
Solution 2:
Pretax Amount of Liability At December 31
Present Value of Lease payments	3000000
Add: Interest expense [(3000000-562907)*5%]	121855
less: Payments (semiannual payment *2)	1125814
Pretax Amount of Liability	1996041
Pretax Amount of Asset At December 31
Value of Asset	3000000
Less: Depreciation (Value of Asset/ Semiannual periods)	500000
Pretax Amount of Asset	2500000
Solution 3:
Pretax Amounts in Income statement for Year ended Dec 31
Pretax amount of Interest expense	121855
Pretax amount of Amortization expense	500000
Total	621855