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 $509,761 over a five-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%, 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 $4.3. (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 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 answer to nearest whole dollar.)

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 $509,761 over a five-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%, 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 $4.3. (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 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 answer to nearest whole dollar.) . Present value 2. Pretax amount for liability Pretax amount for right-of-use asset 3. Pretax amount for interest expense Pretax amount for amortization expense

Answer 1

Dear student, Use Present value factor from your table, other wise it might be possible Minor difference in solution due to rounding of PV factor.

Incremental borrowing rate per year is 8%,
Incremental borrowing rate per semiannual is (8%/2)	4%
Year	Present Value Factor @ 4%
1	1.00000
2	0.96154
3	0.92456
4	0.88900
5	0.85480
6	0.82193
7	0.79031
8	0.75992
9	0.73069
10	0.70259
Total	8.43533

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.
Present value (8.43533*509761)	$        4,300,002
What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2018?
Liability	$        3,432,090
right-of-use asset (4300002-430000)	$        3,870,002
Amortization per year (4300002/5)	$            860,000
Amortization per semiannual (860000/2)	$            430,000
What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2018?
Interest Expense	$            151,610
Amortization Expense	$            430,000

Lease amortization table - lessee
Date	Beginning balance of lease payable	Lease payment	Interest expense (beginning balance of lease payable *4% )	Reduction in lease payable (lease payment - interest expense)	Beginning balance of lease payable (beginning balance of lease payable - reduction in lease payable)
June 30, 2018	4,300,002	509,761		509,761	3,790,241
Dec 31, 2018	3,790,241	509,761	151,610	358,151	3,432,090