3. THE LESSEE'S FINANCE LEASE Leslie's Leasing Company ("Leslie") leases assets to Lester's Construction Company (Lester). Leslie is the Lessor and Lester is the Lessee. Lester is a public American company that files financial statements with the SEC. Therefore it must follow the new accounting rules for lease contracts. Those rules require that the lease contract is recognized "on balance sheet." Lester believes they have negotiated a new lease with Leslie that is a "finance lease." Leslie is "not so sure" about this. Lester's fiscal year coincides with the calendar year; its year end is December 31*. Use the "Factor" table below if you need such factors. The terms of the lease contract are below. Answer the questions that follow on the next page. START DATE January 1, 2019 CONTRACT END DATE December 31, 2022 FAIR VALUE of the LEASED ASSET: $100,000, after customization ESTIMATED ECONOMIC LIFE of the LEASED ASSET: 4 years from January 1, 2019 PROVISIONS TO TRANSFER OWNERSHIP: PURCHASE OPTION CONTAINED IN THE LEASE: None None ANNUAL LEASE PAYMENTS: $ 27,549 made at the END of each year 4% LESLIE's (the Lessor's) IMPLIED INTEREST RATE: RESIDUAL VALUE (Expected and Contractual): None ASSET SALVAGE VALUE at end of LEASE TERM: None Present Value Annuity Factors from Chapter 6 of Kieso, et. al.'s Intermediate Accounting 16h Edition FACTORS YEAR PRESENT VALUE of 1 FUTURE VALUE of 1 PV of ORDINARY ANNUITY of 1 PV of ANNUITY DUE of 1 "n" TABLE 6-2 Table 6-1 Table 6-4 Table 6-5 Payments at End Payments at Beginning Discount 3% 4% 4% 5% 4% 5% 3% 4% Rates 1 2 3 4 5 .97087 94260 .91514 .88849 .86261 .96154 .92456 .88900 .85480 .82193 1.04000 1.08160 1.12486 1.16986 1.21665 1.05000 1.10250 1.15763 1.21551 1.27628 .96154 1.88609 2.77509 3.62990 4.45182 .95238 1.85941 2.72325 3.54595 4.32948 1.00000 1.97087 2.91347 3.82861 4.71710 1.00000 1.96154 2.88609 3.77509 4.62990 THE LESSEE'S FINANCE LEASE (continued) 1. Calculate the Present Value of the Lease Payments from Lester's perspective as of 1/1/2019. 2. Consider the 5 Lease Classification Tests. Which tests were "passed" and why? 3. Considering your answer in # 2 above, has this lease been properly described as a Lessee's Finance Lease? 4. Prepare an Amortization Table for the Lease Obligation 5. Prepare a Table that will show each of the two expenses that will be recorded in the Income Statement for each of the next four years. Be sure to sum them up in an additional column. 6. Considering the Table in question #5. Does this lease result in "front end loading" in the Lessee's Income Statement? Why? 7. Add up and state the total of the payments made to Leslie during the term of the lease. 8. Add up and state the total of all expenses charged to Earnings during the term of this lease. with 9. Are the amounts the same or different in # 7 and #8 and is the answer you come correct? (State: SAME/DIFFERENT and CORRECT/WRONG)