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 $530,475 over a 4-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 10.0%, the same rate Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $3.1 million. (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.) 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)? (For all requirements, enter your answers in whole dollars and not in millions. Round your final answer to nearest whole dollar.) 1. Present value K Prev 2 of 4 l Next> 11:0 4/8/

Explanation / Answer

(1) Calculation of price at which Builders is 'selling' the Equipment:

= semi-annual lease payment*(present value of annuity due: n= 8, i= 5%)

= $530,475*6.7864 = $3,600,000 (rounded)

(2) Calculation of amounts related to the lease to be reported in the balance sheet:

Receivables at December 31, 2018

Note: The Receivables replaces the $3,100,000 Equipment on the balance sheet.

Solution:(3): Calculation of amount to the lease to be reported in the income statement:

Interest Revenue for the year ended Dec 31, 2018

Income effect = (3600000-3100000)+153475

= $653,475

Working notes:

*June 30, 2018:

Lease Receivable (PV Calculated above) = $3,600,000

Cost of goods sold (lessor's Cost) = $3,100,000

Sales revenue (PV Calculated above) = $3,600,000

Inventory of Equipment (Lessor's Cost) = $3,100,000

Cash (Lease payment) = $530,475

Lease Receivable = $530,475

**December 31, 2018:

Cash (Lease Receivable) = $530,475

Lease Receivable = $530475-$153475= $377,000

Interest revenue[5%*(3600000-530475)] = $153,475

Particulars Amount ($) Initial Balance, June 30, 2018 3,600,000 Less: June 30, 2018 reduction (530,475)* Less: Dec 31, 2018 reduction **(377,000) Dec 31, 2018 Net Receivable 2,692,525

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