On June 30, 2013. Georgia-Atlantic, Inc ., leased a warehouse facility from IC l

Question

On June 30, 2013. Georgia-Atlantic, Inc ., leased a warehouse facility from IC leasing Corporation. The lease agreement calls for Georgia-Atlantic lo make semiannual lease payments of $478,767 over a four-year lease term, payable each June 30 and December 31. with the first payment a June 30, 2013 Georgia-Atlantic's incremental borrowing rate is 12%. the same rate IC used 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 $3,151,426 (FV of $1, PV of $1, FVA of $1, FVAD of $1 and PVAD of $1. (Use appropriate factor(s) from the tables provided.) Rebutted: 1. Determine the present value of the lease payments at June 30, 2013 that Georgia-Atlantic used to record the leased asset and lease liability. (Enter your answer in whole dollars.) 2 What pretax amounts related to the would Georgia-Atlantic report in its balance sheet at December 31. 2013? (Enter your answers in whole dollars.)

Explanation / Answer

Semi Annual lease payment is $ 478,767.00

Incremental Rate is 12%

As it is semi-annual and for four years, we have to see the factor in the PVAD $1 table at 6% (12%÷2) for 8 periods (4 * 2) it is 6.58238

   Present value will be $478,767 * 6.58238 = $3,151,426

2. Assuming this is a financial lease, Warehouse needs to be capitalized and equal amount of lease liability needs to be recognized. The amount to be capitalized is lower of the present value of lease payments or the fair market value of the asset. Fair market value is given as $ 3,151,426 and the present value of lease payments calculated in question 1 above is also $3,151,426. So the pretax amount in the Asset account on Dec 31st, 2013 is $3,151,426.

As it is a finance lease, the company can claim depreciation on the asset. But as we know, the depreciation will be accumulated in a separate account called Accumulated depreciation account. Even though the net asset value decreases by the depreciation amount, the balance in the asset account will remain at $3,151,426.

On June 30, 2013, we have recognized the liability at $3,151,426 and made two payments of $ 478,767 each in 2013. This payment includes interest portion also. So Interest portion needs to be recognized in the income statement and principal portion is reduced from the liability. As discussed in question above, as we are paying semiannually, interest will be 6%. The payments are done at the beginning of the period. So first interest calculation will be as follows:

(Initial liability – Lease payment) * Interest rate

= (3,151,426 – 478,767) * 6% = $160,359.56

This is the interest amount included in the first payment made on Jun 30, 2013.

The carry forward balance for the 2nd semiannual payment will be 3,151426 -478,767 + 160,359.26 = $2,833,018.89

Again interest on this will be included in the payment made on Dec 31st.

(2,833,018.19 – 478,767) * 6% = $141,255.11

Now total of payments done in 2013 are $ 478,767 * 2 = $957,534 and in that interest portion is $ 160,359.56 + $141,255.11 = $301,614.67. Principal portion will be $957,534 - $ 301,614.67 = $655,919.53.

To find out the pretax balance of the liability we have to reduce this principal portion from $ 3,151,426. So the balance is $ 3,151,426 - $655,919.53 = $2,495,506

Here to summarize the pretax balances

Pretax amounts

Liability

$2,495,506

Asset

$3,151,426

3. The interest amounts as calculated in Question 2 above need to be reported in the income statement for the year 2013.

That is $160,359.56 +$ 141,255.11 = $301,615 (rounded off to whole dollars)

Pretax amounts

Liability

$2,495,506

Asset

$3,151,426

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