On June 30, 2013, Georgia-Atlantic, Inc., leased a warehouse facility from IC Le
ID: 2485725 • Letter: O
Question
On June 30, 2013, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $648,358 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2013.Georgia-Atlantic’s incremental borrowing rate is 10%, 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 $4,399,997. (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:
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 lease would Georgia-Atlantic report in its balance sheet at December 31, 2013? (Enter your answers in whole dollars.)
3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2013? (Enter your answer in whole dollars.)
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.)
Present valueExplanation / Answer
1.
Present value of the lease payments at June 30, 2013 that Georgia-Atlantic used to record the leased asset and lease liability.
Semi-annual lease payments is $648,358
First instalment was paid on June 30,2015
Total semi annual payments are 8
Incremental borrowing rate is 10% so semiannual rate is 5%
Present value of the lease is calculated as under:
Present Value = Semi annual payment * factor for 8 payments
= 648,358 * 6.78637
= 4,399,997
Factor is used for 8 payments and 4 years
2.
Pretax liability and asset shown in the balance sheet is as under:
Liability as on december 31, 2013 is:
Initial Balance 4,399,997
June 30 reduction 648,358
Dec 31 reduction 460,776
December 31, net liability 3,290,863
Asset is calculated as under:
Asset value is $4399997
Less: Dep for 6 months 550000
So net asset as on December 31, 2013 is $3849997
3.
Amount reported in Income statement is as under:
Interest expense
June 30 0
December 31 187,582 187,582
Depreciation expense 550,000
A B C D Year Lease Payment Interest (5%) Reduction of Lease Obligation Balance of Lease Obligation (D*5%) (A-B) (D-C) Beginning 4399997 1 6,48,358 0 6,48,358 37,51,639 2 6,48,358 1,87,582 4,60,776 32,90,863Related Questions
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