On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Le

Question

On June 30, 2018, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgla-Atlantic to make semiannual lease payments of $677829 over a four-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. Depreclation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $4.6. (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 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 millilons. Round your final answer to nearest whole dollar.) 1. 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

Explanation / Answer

Solution 1:

Semiannual lease payment = $677,829

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 10%, 5% semiannual

Present value of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 5%

= $677,829 * 6.786373 = $4,600,000

Solution 2:

Semiannual payment on 30.06.2018 = $677,829

Pretax amount of liability on 30.06.2018 = ($4,600,000 - $677,829) = $3,922,171

Interest expense for 31.12.2018 = $3,922,171 * 5% = $196,109

Semiannual lease payment on 31.12.2018 = $677,829

Pre tax amount for liability December 31, 2018 = $3,922,171 + $196,109 - $677,829 = $3,440,451

Depreciation on right to use assets for 2018 = $4,600,000 / 4 * 6/12 = $575,000

Pre tax amount of right to use asset to be reported for 2018 = $4,600,000 - $575,000 = $4,025,000

Solution 3:

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement = $3,922,171 * 5% = $196,109

Pre tax amoun of amortization expenses Georgia Atlantic Inc. reports in its income statement = $4,600,000 / 4 * 6/12 = $575,000

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