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. (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.) X Answer is complete but not entirely correct. 1. Present value Pretax amount for liability Pretax amount for right-of-use asset Pretax amount for interest expense Pretax amount for amortization expense $ 3,000,000 $ 562,907 X $ 441,052 121,855 500,000

Answer 1

Calculation of the present value of lease payments
$562,907 x PVAD(5%,6)	$3,000,000
Liability at December 31, 2021
Initial balance, June 30, 2021	$3,000,000
LESS: June 30, 2021 reduction	$   562,907.00
LESS: Dec. 31, 2021 reduction (562907 - (5% x (3,000,000 - 562907)	$   441,052.36
December 31, 2021 net liabilitY	$1,996,040.36
2) PRETAX AMOUNT FOR LIABILITY	$1,996,040.36
Right-of-Use Asset at December 31, 2021
Initial balance, June 30, 2021	$3,000,000
Amortization expense ($3,000,000 / 3 years × ½ year)	$499,999.95
PRETAX AMOUNT OF RIGHT OF USE ASSET	$2,499,999.77