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 $464,149 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 8%, 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 $3.2 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.)

Answer 1

A) = $3,249,995

B) pretax amount for for liability = $2,433,131

Depreciation amount for right of use = = $406,249

C) pretax amount for interest expense = $111,434

pretax amount for amortization expense = $406,249

Step-by-step explanation:

1) Determining the present value of the lease payments at June 30 2021

semi-annual payments = $464149 for 4 - year lease term

total payments = 2 * 4 = 8

Yearly incremental borrowing = 8%

semi-annual incremental borrowing = 8/2 = 4%

hence present value of the lease payments

= semi annual lease payments * cumulative PV factor of annuity for the period

= $464149 * 7.00205 = $3,249,995

2) Determining The pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31 2021

first we calculate the pretax amount of liability on 30.06.2021

= present value of lease payments - semi annual lease payments

= $3,249,995 - $464,149 = $2,785,846

next we calculate the Interest expense for 31.12.2021

= pretax amount * semi-annual incremental borrowing

= $2,785,846 * 4% = $111,434

Semiannual lease payment on 31.12.2021 = semiannual lease payment on 30.06.2021 which is = $464,149

Pre tax amount for liability for 31.12.2021

= pretax amount of liability + interest expense - semi annual lease payment

= $2,785,846 + $111,434 - $464,149 = $2,433,131

Depreciation on right to use assets for 2021

= present value of lease payments / 4 * ( 6/12 )

= ($3,249,995 / 4) * (6/12) = $406,249

Pre tax amount of right to use asset to be reported for 2021

= (present value of lease payments) - (depreciation on right to use assets)

= $3,249,995 - $406,249 = $2,843,746

3) Determine pretax amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2021

Pre tax amount of interest expense Georgia Atlantic Inc. reports in its income statement will be

semi-annual lease payments * semi-annual incremental borrowing

= $2,785,846 * 4% = $111,434

Pre tax amount of amortization expenses Georgia Atlantic Inc. reports in its income statement will be

= (present value of lease payments / 4) * (6/12)

= $3,249,995 / 4 * 6/12 = $406,249