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

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 $512,709 over a five-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 8%. 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 $4,324,870. Required: 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. 2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2013? 3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2013?

Explanation / Answer

1. Present value on June 30th = Semi annual lease payment * PVAF(4%,10)

= $512,709*8.1110

= $41,58,583

Note the discount rate use is 4% as the lease payments are made semi annually, and the number of payments are 10 as the payments are made semi annually.

2. AS on 31st December 2013

Liability to be recorded = PV of lease payment - Principal paid for next semi annual lease payment

= PV of lease payment - (semi annual lease payment - interest)

= $41,58,583 - ($512,709-$166,343)

= $38,12,217

Note: Interest paid = $41,58,583*4% = $166,343.

Asset to be recorded = Fair value of Asset - Depreciation

= Fair value - (Fair value / number of years)

= $43,24,870 - ($43,24,870/5)

= $34,59,896.

Note: Depreciation is taken on SLM basis as given in the question.

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