On June 30, 2016, Blue, Inc., leased a machine from Big Leasing Corporation. The
ID: 2488514 • Letter: O
Question
On June 30, 2016, Blue, Inc., leased a machine from Big Leasing Corporation. The lease agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of $180,073 over a five-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2016. Blue's incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. (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.) Determine the present value of the lease payments at June 30, 2016, (to the nearest $000) that Blue uses to record the leased asset and lease liability. What would be the pretax amounts related to the lease that Blue would report in its balance sheet at December 31, 2016? What would be the pretax amounts related to the lease that Blue would report in its income statement for the year ended December 31, 2016?Explanation / Answer
1. The present value of the lease payments at June 30, 2016 (to the nearest $000) that Blue uses to record the leased asset and lease liability.
Present Value : $1460000
2. The pretax amounts related to the lease that Blue would report in its balance sheet at December 31, 2016
*Leased Liability : $1163850
**Leased Asset : $1314000
( *Present Value - Installement on 30th June 2016 - Lease liability amount of Installemnt to be paid on 31,December 2016
= $1460000-$180073-$116077
= $1163850
**Lease Asset - (Lease Asset/No. of years of use)*4.5
= $1460000 - (1460000/5)4.5
= $1314000 )
3. Pretax amounts related to the lease that Blue would report in its income statement for the year ended December 31, 2016
***Pretax Amount : $209997
(***Finance Charges + Depreciation) i.e. ( $146000 + $63997 = $209997)
Installment No. Amount Of Installment Present Value factor @ 5% Present Value ($) 1 180073 1 180073 2 180073 0.952 171498 3 180073 0.907 163332 4 180073 0.864 155554 5 180073 0.823 148147 6 180073 0.784 141092 7 180073 0.746 134373 8 180073 0.711 127975 9 180073 0.677 121880 10 180073 0.645 116077 Total 180073 8.108 $1460000Related Questions
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