Question

E 15-5 Sales-type lease; lessor; balance sheet and income statement effects LO15-3 On June 30, 2021, Georgia-Atlantic, Inc. leased warehouse equipment from Builders, Inc. The lease agreement calls for Georgia-Atlantic to make semiannual lease payments of $562,907 over a three-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 Builders used to calculate lease payment amounts. Builders manufactured the equipment at a cost of $2.5 million. Required: 1. Determine the price at which Builders is "selling” the equipment (present value of the lease payments) at June 30, 2021 (to the nearest $000). 2. What amount related to the lease would Builders report in its balance sheet at December 31, 2021 (ignore taxes)? 3. What line item amounts related to the lease would Builders report in its income statement for the year ended December 31, 2021 (ignore taxes)?

Answer 1

Georgia-Atlantic, Inc., Requirement 1 Calculation of the present value of lease payments ("selling price") $562,907 5.32948 = $3,000,000 (rounded) present value of an annuity due of $1: n = 6, i = 5.0% Requirement 2 Receivable at December 31, 2021 Initial balance, June 30, 2021 June 30, 2021 reduction Dec. 31, 2021 reduction December 31, 2021 receivable 3000000 -562907 -441052 1996041 Requirement 3 Income effect for year ended December 31, 2021 30.6.2021 interest revenue 31.12.2021 interest revenue 2021 interest revenue Sales revenue Cost of goods sold Income effect 0 121855 121855 3000000 -2500000 621855

Journal Enteries Date Particulars 30.6.2021 Lease receivable a/c Dr. Cost of goods sold a/c Dr. To Sales revenue To Inventory of equipment Debit in $ Credit in $ 3000000 2500000 3000000 2500000 562907 Cash a/c Dr. To Lease receivable 562907 30.12.2021 Cash a/c Dr. 562907 To Lease receivable To Interest revenue (5.0% x ($3,000,000 -562,907]) = 121855 441052 121855