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 $562,907 over a three-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 million.

Required:
a. 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.
b. What pretax amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2021

Answer 1

1. $3,000,000

2. Liability $1,996,041

Asset$2,500,000

Step-by-step explanation:

1. Calculation to Determine the present value of the lease payments at June 30, 2021

Present value of lease payments will be calculated as : $562,907 × 5.32948

(Present value of an annuity due of $1:

n = 6, i = 5% is 5.32948)

Present value of lease payments = $3,000,000

Therefore the Present value of lease payments will be $3,000,000

2. Calculation to Determine the pretax amounts related to the lease that Georgia-Atlantic would report in its balance sheet at December 31, 2021

Liability at December 31, 2021

Initial balance, June 30, 2021 3,000,000

June 30, 2021 Reduction(562,907)

Dec. 31, 2021 reduction (441052)

[562,907-(3,000,000-562,907)*5%]

December 31, 2021 NET LIABILITY $1,996,041

ASSETS at December 31, 2021

Initial balance, June 30, 2021 3,000,000

Accumulated depreciation at Dec. 31, 2021 (500,000)

(3000000/3*1/2)

December 31, 2021 ASSETS $2,500,000

Therefore the pretax amounts related to the lease that Georgia-Atlantic would report in its balance sheet at December 31, 2021 will be : Liability $1,996,041

Asset$2,500,000