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

Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $512,709 over a 5-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 12.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.5 million. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.
2. What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?
3. What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?

Explanation / Answer

Given that

Interest Rate = 12%

Semiannual interest Rate = 12% * 6/12 = 5%

Number of Semiannual terms = 5 * 2 = 10

Lease Payament (A) = $512709

1) Present Value of Lease Payament = (PVA 6%,10) * A

= 7.80169 * $512709

= 4000000 (Rounded)

Amortisation Schedule :-

2) Amount of Asset Report in Balance Sheet = $3183819

3) Interest Revenue for 2018 = $209237

Date Beginning Balance Payment Interest Principal Balance at end Jun. 30 4000000 512709 0 512709 3487291 Dec. 31 3487291 512709 209237 303472 3183819

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