On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Lea

Question

On June 30, 2018, Georgia-Atlantic, Inc., leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $736,771 over a four-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%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc.. at a cost of $5.0 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. What pretax amounts related to the lease would IC report in its balance sheet at December 31, 2018?
2. What pretax amounts related to the lease would IC report in its income statement for the year ended December 31, 2018?

Explanation / Answer

Interest Rate = 10%

Semiannual interest Rate = 10% * 6/12 = 5%

Number of Semiannual terms = 4 * 2 = 8

Lease Payament (A) = $736771

Present Value of Lease Payament = (PVA 5%,8) * A

= 6.78637 * $736771

= 5000000

Amortisation Schedule :-

1) Amount of Asset Report in Balance Sheet = $3739619

2) Interest Revenue for 2018 = $213161

Date Beginning Balance Payment Interest Principal Balance at end Jun. 30 5000000 736771 0 736771 4263229 Dec. 31 4263229 736771 213161 523610 3739619

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