On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility from IC Le
ID: 2480426 • Letter: O
Question
On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $468,683 over a five-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2016.Georgia-Atlantic’s incremental borrowing rate is 10%, the same rate IC used to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The fair value of the warehouse is $3,799,997. (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.)
Determine the present value of the lease payments at June 30, 2016 that Georgia-Atlantic used to record the leased asset and lease liability.
What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2016?
What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2016?
Required:Explanation / Answer
Answer:
1. Present Value of lease payments at 30.06.2016 = $ 468,683 x Present Value Annuity Factor for 10 periods at 10% = $ 468,683 x 6.14456 = $ 2,879,850.8114. Alternately, the calculations can be done by considering that present value of lease payment due and paid on 30.06.2016 is $ 468,683 instead of $ 468,683 x 0.9090 = $ 426,032.847. Then PV = $ $ 2,879,850.8114 - $ 426,032.847 + $ 468,683 = $ 2,922,500.9644
2. Pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2016 shall be as under;
Lease Rent Recivable (assuming Lease payment of June 2016 is recived and Lease payment of Dec, 2016 is yet to be received) = $ 468,683 in Accounts Receivable.
3. Pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2016 shall be as under;
Lease Rent Received / Recivable - Depreciation = $ 468,683 x 2 - $ 3,799,997 / 5 = $ 937,366 - $ 759,999.40 = $ 177,366.60
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