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 $677,829 over a four-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 10%, the same rate IC used to calculate lease payment amounts. IC purchased the equipment from Builders, Inc. at a cost of $4.6 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

IC would report a pretax amount related to the lease of approximately $3,638,237.76 on its balance sheet at December 31, 2021.

To calculate the pretax amount related to the lease that IC would report in its balance sheet at December 31, 2021, we can use the present value of an ordinary annuity formula. The present value of an ordinary annuity formula is given by:

PV = PMT * [1 - (1 + r)^(-n)] / r

where:

PV is the present value of the annuity,

PMT is the periodic payment,

r is the periodic interest rate, and

n is the total number of periods.

In this case, the periodic payment (PMT) is the semiannual lease payment, the periodic interest rate (r) is the incremental borrowing rate, and the total number of periods (n) is the total number of semiannual payments over the lease term.

Given data:

Semiannual lease payment (PMT) = $677,829

Incremental borrowing rate (r) = 10% or 0.10

Total number of semiannual payments (n) = 4 years * 2 payments per year = 8

Now, let's plug in these values into the formula:

PV = $677,829 * [1 - (1 + 0.10)^(-8)] / 0.10

PV ≈ $677,829 * [1 - (1.10)^(-8)] / 0.10

PV ≈ $677,829 * [1 - 1 / 2.158924] / 0.10

PV ≈ $677,829 * (0.536927) / 0.10

PV ≈ $3,638,237.76

Therefore, IC would report a pretax amount related to the lease of approximately $3,638,237.76 on its balance sheet at December 31, 2021.