On June 30, 2016, Blue, Inc., leased equipment from Big Leasing Corporation. The

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Question

On June 30, 2016, Blue, Inc., leased equipment from Big Leasing Corporation. The lease agreement qualifies as a direct financing lease and calls for Blue to make semiannual lease payments of $266,443 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2016. Blue’s incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. (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.)

What would be the pretax amounts related to the lease that Big would report in its balance sheet at December 31, 2016? (Round the PV of semi-annual lease payments to nearest thousand.)

What would be the pretax amounts related to the lease that Big would report in its income statement for the year ended December 31, 2016?

Please list all steps. Thanks

Explanation / Answer

June 30,2016

Leased equipment a/c Dr 2131544

To Big leasing corporation a/c 2131544

Amount of $266443 to be paid in 8 instalments

Big leasing corporation a/c Dr 266443

To cash/Bank a/c 266443

Dec 31, 2016

Big leasing corporation a/c Dr 266443

To cash/Bank a/c 266443

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On June 30, 2016, Blue, Inc., leased equipment from Big Leasing Corporation. The

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