Question

On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $403,067 over a five-year lease term (also the asset’s useful life), payable each June 30 and December 31, with the first payment at June 30, 2021. Georgia-Atlantic's incremental borrowing rate is 8%, the same rate IC used to calculate lease payment amounts. IC purchased the equipment from Builders, Inc. at a cost of $3.4 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.) What pretax amount related to the lease would IC report in its balance sheet at December 31, 2021?

Answer 1

The pretax amount related to the lease that IC Leasing Corporation would report on its balance sheet at December 31, 2021, can be calculated by finding the present value of the remaining semiannual payments, adjusting for the payment made at the inception of the lease.

Step-by-step explanation:

To determine the pretax amount related to the lease that IC Leasing Corporation would report in its balance sheet at December 31, 2021, we need to calculate the present value of the lease payments using the present value of an annuity due formula, since the first lease payment is made immediately at the beginning of the lease term on June 30, 2021. The lease term is five years with semiannual payments, so there will be a total of 10 payments. Since the incremental borrowing rate is 8% per year, the semiannual rate is 4%.

Calculation Steps

1. Find the present value factor for an annuity due by using the formula for the present value of an annuity due at a 4% semiannual rate for 10 periods.
2. Calculate the present value of the lease payments by multiplying the semiannual payment amount by the present value factor obtained in step 1.
3. Subtract the first payment made on June 30, 2021, since it is not included in the present value calculation as it's already paid.

The pretax lease liability that IC would report on December 31, 2021, can be found by carrying out these steps with the provided payment amount and interest rate, taking into account that the first payment has already been made.