898 SECTION 3 Financial Instruments and Liabilities 2. What amounts related to the lease would Georgia-Atlantic report in its balance sheet at December 31, 2016 (ignore taxes)? 3. What amounts related to the lease would Georgia-Atlantic report in its income statement for the year ended December 31, 2016 (ignore taxes)? On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility 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, 2016. Georgia-Atlantic’s incremental borrowing rate is 10%, the same rate IC used to calculate lease payment amounts. IC purchased the warehouse from Builders, Inc. at a cost of $3 million. Required: 1. What amounts related to the lease would IC report in its balance sheet at December 31, 2016 (ignore taxes)? 2. What amounts related to the lease would IC report in its income statement for the year ended December 31, 2016 (ignore taxes)? On June 30, 2016, Georgia-Atlantic, Inc., leased a warehouse facility from Builders, Inc. 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, 2016. Georgia-Atlantic’s incremental borrowing rate is 10%, the same rate Builders used to calculate lease payment amounts. Builders constructed the warehouse at a cost of $2.5 million. Required: 1. Determine the price at which Builders is “selling” the warehouse (present value of the lease payments) at June 30, 2016 (to the nearest $000). 2. What amounts related to the lease would Builders report in its balance sheet at December 31, 2016 (ignore taxes)? 3. What amounts related to the lease would Builders report in its income statement for the year ended December 31, 2016 (ignore taxes)? Airway Leasing entered into an agreement to lease aircraft to Ouachita Airlines. Consider each of the following, a–e, to be independent scenarios. a. The agreement calls for ownership of the aircraft to be transferred to Ouachita Airlines at the end of the lease term. b. The fair value of the aircraft is expected to be $500,000 at the end of the lease term. Ouachita has the option to purchase the aircraft at the end of the lease term for $90,000. c. The aircraft has a useful life of 20 years, and the term of the lease is 14 years. d. The present value of the lease payments is $8,900,000 and the fair value of the leased aircraft is $10,000,000. e. The aircraft was manufactured to meet specifications provided by Ouachita to optimize the exclusively regional nature of its flights. Required: 1. In each scenario, indicate whether Ouachita would classify the lease as an operating lease or capital lease under U.S. GAAP. Assume the lease agreement has not met any of the other criteria of a capital lease. Provide brief explanations. 2. In each scenario, indicate whether Ouachita would classify the lease as an operating lease or finance lease under IFRS. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations. Each of the three independent situations below describes a capital lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit rate of return. E 15–9 Direct financing lease; lessor; balance sheet and income statement effects ● LO15–5 E 15–10 Sales-type lease; lessor; balance sheet and income statement effects ● LO15–6 E 15–11 IFRS; lease classification ● LO15–3, LO15–11 IFRS E 15–12 Lessor calculation of annual lease payments; lessee calculation of asset and liability ● LO15–5 Situation 1 2 3 Lease term (years) 10 20 4 Lessor’s rate of return (known by lessee) 11% 9% 12% Lessee’s incremental borrowing rate 12% 10% 11% Fair value of leased asset $600,000 $980,000 $185,000 Required: For each situation, determine: a. The amount of the annual lease payments as calculated by the lessor. b. The amount the lessee would record as a leased asset and a lease liability.
Spiceland_Inter_Accounting8e_Ch15
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