On June 30, 2018, Atlas, Inc. leased a warehouse facility from LT Leasing Corpor

Question

On June 30, 2018, Atlas, Inc. leased a warehouse facility from LT Leasing Corporation. The lease agreement calls for Atlas to make semiannual lease payments of $1.688,721 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Atlas's incremental borrowing rate is 10%, the same rate LT uses to calculate lease payment amounts. The fair value of the warehouse is $9 million. LT recently purchased the warehouse for $9 million. Requlred: Amortization is recorded on a straight-ine basis at the end of each fiscal year 1. Determine the present value of the lease payments at June 30, 2018 (to the nearest $000) that Atlas uses to record the right-of-use asset and lease liability. 2. What amounts related to the lease would Atlas report in its balance sheet at December 31, 2018? (gnore taxes.) What amounts related to the lease would Atlas report in its income statement for the year ended December 31, 2018? (Ignore taxes. (For all requlrements, Round your final answers to nearest whole dollar) 1. Present value 2. Liability Right-of-use asset 3. Interest expense Amortization expense

Explanation / Answer

1)

Semi annual lease payment = 1688721

Incremental borrowing rate = 10%

Semi annual rate = 10%/2 = 5%

Present value of lease payment = 1688721 + 1688721 *Present value annuity factor(5%,5)

= 1688.721 + 1688721*4.3294 = 1688721+7311149 = 8999870 which is approx 9000000

2)

Interest Expense on December 31,2018 = (9000000-1688721)*5% = 365564

Amount to be reported as on December 31,2018 = 9000000 - 1688721 - 1688721 + 365564 = 5988122

3)

Interest Expense = 365564

Amortisation expense = 9000000/6= 1500000

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