Questions: On June 30, 2024, Georgio Motor Co. entered into a lease agreement with Incorporated Trust Agreement for lease payments of 530,475 over a 5-year lease term, plus the usual 3 months of rent-free (the lease commences on June 30, 2024). Georgio Motor Co. determines that its incremental borrowing rate is 6% to calculate lease payments amounts. Baldwin measured and the equipment at a cost of 2,517 million. Required: 1. What is the present value of the lease payments on June 30, 2024? 2. What amount related to the lease would Baldwin report in its balance sheet on December 31, 2024 (ignore taxes)? 3. What are the amounts related to the lease that Baldwin reports in its income statement for the year ended December 31, 2024 (ignore taxes)? Requirement: Round your intermediate calculations and your answers in whole dollars and not in millions. Round the intermediate calculation and final answer to the nearest whole dollar.

To solve the problem, we need to calculate the present value of the lease payments, determine the amount to be reported on the balance sheet, and identify the amounts to be reported in the income statement. Let's go through each requirement step by step.

Lease Details:

• Lease term: 5 years
• Lease payments: $530,475 annually
• Rent-free period: 3 months
• Incremental borrowing rate: 6%

Since there is a 3-month rent-free period, the first payment will be made at the end of the first year. Therefore, the lease payments are an ordinary annuity starting at the end of the first year.

Present Value Calculation: To find the present value of the lease payments, we use the Present Value of an Ordinary Annuity (PVOA) formula:

\[ PV = P \times \left(1 - (1 + r)^{-n}\right) / r \]

Where:

• \( P = 530,475 \) (annual lease payment)
• \( r = 0.06 \) (annual interest rate)
• \( n = 5 \) (number of payments)

\[ PV = 530,475 \times \left(1 - (1 + 0.06)^{-5}\right) / 0.06 \]

\[ PV = 530,475 \times 4.21236 \] (using a PVOA factor for 5 years at 6%)

\[ PV = 2,234,000 \] (rounded to the nearest whole dollar)

By December 31, 2024, half a year has passed since the lease commenced. The balance sheet will report the lease liability and the right-of-use asset.

Lease Liability: The lease liability is initially the present value of the lease payments, which is $2,234,000. By December 31, 2024, interest will have accrued on this liability.

Interest for 6 months = \( 2,234,000 \times 0.06 \times \frac{6}{12} = 67,020 \)

The first lease payment of $530,475 will be made at the end of the first year, so the lease liability on December 31, 2024, remains $2,234,000 plus accrued interest.

Right-of-Use Asset: The right-of-use asset is initially equal to the lease liability. It will be amortized over the lease term. However, since no payment has been made by December 31, 2024, the right-of-use asset remains at its initial value of $2,234,000.

Interest Expense: The interest expense for the year is the interest accrued on the lease liability:

Interest Expense = $67,020

Amortization Expense: The right-of-use asset is amortized over the lease term. The annual amortization expense is:

Amortization Expense = \( \frac{2,234,000}{5} = 446,800 \)

Income Statement Reporting:

• Interest Expense: $67,020
• Amortization Expense: $446,800

1. Present Value of Lease Payments: $2,234,000
2. Balance Sheet Amount on December 31, 2024:
   • Lease Liability: $2,234,000
   • Right-of-Use Asset: $2,234,000
3. Income Statement Amounts for 2024:
   • Interest Expense: $67,020
   • Amortization Expense: $446,800