On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Lea

Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $779,224 over a three-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 9%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc.. at a cost of $4.2 million. (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: 1. What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2018? 2. What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2018? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to nearest whole dollar.)

Explanation / Answer

1) Semiannual interest rate = 9%*6/12 = 4.5%

Semi annual periods in the lease life = 3 years*2 periods in a year = 6 periods

Lease receivable at June 30, 2018 = Present value of semiannual lease payments

= ($779,224*1.0)+[$779,224*PVAF(4.5%, 5 periods)

= $779,224+($779,224*4.3899767)

    = $779,224+$3,420,776 = $4,200,000 (approx.)

Receivable decrease on the payment of first lease amount = $779,224 (No interest included)

Receivable decrease on the payment of first lease amount = $779,224 - [($4,200,000-$779,224)*4.5%]

= $779,224 - $153,935 = $625,289

Calculation of Net receivable (Amounts in $)

The receivable replaces the $4,200,000 warehouse building on the balance sheet.

2) Interest Revenue for the year ended December 31, 2018 (Amounts in $)

Workings:

1) Interest revenue in the first lease payment of $779,224 on June 30, 2018 is zero because it is paid on the date of lease.

2) Interest revenue in the second lease payment is calculated as follows:-

Interest Revenue = Lease Receivable Balance*4.5%

= ($4,200,000-$779,224)*4.5% = $153,935

Particulars Net receivable Initial Balance, June 30, 2018 4,200,000 Less: Reduction on June 30, 2018 (779,224) Less: Reduction on December 31, 2018 (625,289) Net Receivable on December 31, 2018 2,795,487

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