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 $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 Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $2.5 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. 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)? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to nearest whole dollar.) Present value 2. Amount to be reported in the balance sheet 1 3. Amount to be reported in the income statement

Answer 1

A) Semiannual Rate :10*6/12 = 5%

Semiannual months : 3*2 = 6

Present value of the lease payments at June 30, 2018 :[PVAD5%,6* A]

             = 5.076*562907

             = $2857316  

2)carrying value of lease liability after first semiannual payment : 2857316 - 562907 = 2294409

Interest accrued for semiannual month ending 31 dec 2018 = 2294409*.05 = 114,720

Lease principal payment = 562907 - 114720 = 448187

Depreciation : 2857316  / 6 = $ 476,219 per semiannual month

Lease liability at dec 2018 : 2294409 - 448187 = 1846222

Lease asset : 2857316   - 476219 = 2381097

3)Interest expense : $114,720

**Interest accrued for semiannual month ending 31 dec 2018 : 2294409*.05 = 114720