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 $880,440 over a 3-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 8.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $4.3 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

Determine the price at which Builders is “selling” the equipment (present value of the lease payments) at June 30, 2018.

What amounts related to the lease would Builders report in its balance sheet at December 31, 2018 (ignore taxes)?

What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2018 (ignore taxes)?

1 Calculation of the present value of lease payments ("selling price") n= 6, i= 4% 5.45182 880,440*5.45182 4800000 2 Receivable at December 31, 2018 Initial balance, June 30, 2018 4800000 June 30, 2018 reduction 880440 Dec. 31, 2018 reduction
880440-(4800000-880440)*4% 723658 December 31, 2018 receivable 3195903 3 Income effect for year ended December 31, 2018 June 30, 2018 interest revenue 0 Dec. 31, 2018 interest revenue
(4800000-880440)*4% 156782 Interest revenue for 2018 156782 Sales revenue* 4800000 Cost of goods sold* 4300000 Income effect 656783

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