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 Georgia-Atlantic to make semiannual lease payments of $681,229 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 8%, the same rate IC uses 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 $4.8.

Required:
1. Determine the present value of the lease payments at June 30, 2018 that Georgia-Atlantic uses to record the right-of-use asset and 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?

1. Present Value 2. Pre-Tax amount Liability Pre-Tax amount for right-of-use asset 3. Pre-Tax amount for interest expense Pre-Tax amount for Amortization Expense

Explanation / Answer

Part 1:

Semi-annual periods

Date

Semi-annual lease payment

Present value factors @4% pa

Present value of lease payments

1

30-06-18

681229

1

681229

2

31-12-08

681229

0.961538

655027.9

3

30-06-19

681229

0.924556

629834.5

4

31-12-19

681229

0.888996

605610.1

5

30-06-20

681229

0.854804

582317.4

6

31-12-20

681229

0.821927

559920.6

7

30-06-21

681229

0.790315

538385.2

8

31-12-21

681229

0.759918

517678.1

Present value lease payments

4770003

Workings:

The rate of interest has been used is 4% to determine the present value of lease payments because the payments have been made semi-annually. Since the first payment of lease rental was made on the day when the lease was initiated, i.e. June 30, 2018 hence, the first lease payment have not been multiplied by present value factor.

annual incremental borrowing rate

8%

Semi-annual rate of borrowing (8% X 6/12)

4%

Part 2:

The present value of lease payments, i.e. $4770003.00 has been deducted by the entire lease payment made on 30th June, 2018 as this was the day on which the lease was initiated.

             

Date

Semi-annual instalment

Interest @8% pa

Principal

Outstanding lease amount

30-06-18

681229

681229

4088774

(4770003 - 681229)

31-12-18

681229

163550.9

517678.1

3571096

(4088774 - 517678.10)

(681229 - 163550.90)

Part 3:

In the year ending on 31st December, 2018 Georgia Atlantic will report only the amount of interest which shall be accrued on the outstanding amount of present value of lease payments for the six months period from 30th June, 2018 to 31st December, 2018, i.e. (4088774 x 8% x 6/12)= $163550.90.

Semi-annual periods

Date

Semi-annual lease payment

Present value factors @4% pa

Present value of lease payments

1

30-06-18

681229

1

681229

2

31-12-08

681229

0.961538

655027.9

3

30-06-19

681229

0.924556

629834.5

4

31-12-19

681229

0.888996

605610.1

5

30-06-20

681229

0.854804

582317.4

6

31-12-20

681229

0.821927

559920.6

7

30-06-21

681229

0.790315

538385.2

8

31-12-21

681229

0.759918

517678.1

Present value lease payments

4770003

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