Question

On June 30, 2021, Georgia-Atlantic, Inc. leased a warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $559,946 over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 10%, the same rate IC uses to calculate lease payment amounts. Amortization is recorded on a straight-line basis at the end of each fiscal year. The fair value of the equipment is $3.8 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 present value of the lease payments at June 30, 2021 that Georgia-Atlantic uses to record the right-of-use asset and lease liability.
2. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2021?
3. What pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2021?
(For all requirements, enter your answers in whole dollars and not in millions. Round your final answers to the nearest whole dollar.)
1. Present value
2. Pretax amount for liability Pretax amount for right-of-use asset
3. Pretax amount for interest expense Pretax amount for amortization expense

Answer 1

Answer:

1. $3,800,001

2. Pretax amount of liability $2,842,112

Pre tax amount of right to use asset $3,325,000

3. Pre tax amount of interest expense $162,003

Pre tax amount of amortization expenses $475,000

Explanation:

1. Calculation for the Present value

Using this formula

PV of minimum lease payments used to record right to use assets = Semi Annual lease payments * Cumulative PV Factor of annuity due for 8 periods at 5%

Where,

Semiannual lease payment = $559,946

Total semiannual payments = 4*2 = 8

Incremental borrowing rate = 10%, 5% semiannual

Let plug in the formula

PV of minimum lease payments used to record right to use assets= $559,946 * 6.78637

PV of minimum lease payments used to record right to use assets= $3,800,001

Therefore the Present value will be $3,800,001

2. Calculation for the Pretax amount for liability and Pretax amount for right-of-use asset

Calculation for Pretax amount of liability

First step is to calculate the Pretax amount of liability on 30.06.2021

Pretax amount of liability on 30.06.2021 = ($3,800,001 - $559,946)

Pretax amount of liability on 30.06.2021= $3,240,055

Second step is to calculate the Interest expense for 31.12.2021

Interest expense for 31.12.2021 = $3,240,055 * 5%

Interest expense for 31.12.2021= $162,003

Now let calculate the Pre tax amount for liability December 31, 2021

Pre tax amount for liability December 31, 2021 = $3,240,055 + $162,003 - $559,946

Pre tax amount for liability December 31, 2021= $2,842,112

Therefore The Pre tax amount for liability December 31, 2021 will be $2,842,112

Calculation for Pre tax amount of right to use asset

First step is to calculate the Depreciation on right to use assets for 2021

Depreciation on right to use assets for 2021 = $3,800,000 / 4 * 6/12

Depreciation on right to use assets for 2021 = $475,000

Now let calculate the Pre tax amount of right to use asset to be reported for 2021

Pre tax amount of right to use asset to be reported for 2021 = $3,800,000 - $475,000

Pre tax amount of right to use asset to be reported for 2021 = $3,325,000

Therefore Pre tax amount of right to use asset to be reported for 2021 will be $3,325,000

3. Calculation for Pretax amount for interest expense Pretax amount for amortization expense

Calculation for Pretax amount for interest expense

Pre tax amount of interest expense = $3,240,054 * 5%

Pre tax amount of interest expense= $162,003

Therefore the Pre tax amount of interest expense will be $162,003

Calculation for Pre tax amount of amortization expenses

Pre tax amount of amortization expenses = $3,800,000 / 4 * 6/12

Pre tax amount of amortization expenses = $475,000

Therefore The Pre tax amount of amortization expenses will be $475,000