Werner Chemical, Inc., leased a protein analyzer from NutraLabs. Inc. on Septemb
ID: 2341910 • Letter: W
Question
Werner Chemical, Inc., leased a protein analyzer from NutraLabs. Inc. on September 30, 2018. NutraLabs manufactured the machine at a cost of $5.35 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $375,232, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. NutraLabs’ implicit interest rate is 8%. Amortization is recorded on a straight-line basis at the end of each fiscal year. The useful life of the equipment is five years. Required: 1. Determine the price at which NutraLabs is “selling” the equipment (present value of the lease payments) at September 30, 2018. 2. What pretax amounts related to the lease would Werner and NutraLabs report in its balance sheet at December 31, 2018? 3. What pretax amounts related to the lease would Werner and NutraLabs report in its income statement for the year ended December 31, 2018? 4. What pretax amounts related to the lease would Werner and NutraLabs report in its statement of cash flows for the year ended December 31, 2018?
Explanation / Answer
1. PV of lease rentals =349131 x PVAF @3% for 20 periods
=349131 x 14.877
= 5194021.887
2. Nutra labs will report PV of lese rentals payable in its balance sheet
PV of lease rentals payable = 349131 x PVAF @3% for 5 to 20 periods
=349131 x 11.160
= 3896302
3. Amount to be recorde in income statement = 5194021.887 x 12%
= 623223
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