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: None PURCHASE OPTION CONTAINED IN THE LEASE: None ANNUAL LEASE PAYMENTS: $ 27,549 made at the END of each year LESLIE's (the Lessor's) IMPLIED INTEREST RATE: 4% 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 16 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 4% 4% 5% 4% 5% 3% 4% Rates 3% .97087 .94260 .91514 .88849 .86261 .96154 .92456 .88900 .85480 .82193 1.04000 1.08160 1.12486 1.16986 1.21665 1.05000 .96154 1.10250 1.88609 1.15763 2.77509 1.21551 3.62990 1.27628 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 .es) Focus 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. 9. Are the amounts the same or different in # 7 and #8 and is the answer you come up with correct? (State: SAME/DIFFERENT and CORRECT/WRONG) I 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: None PURCHASE OPTION CONTAINED IN THE LEASE: None ANNUAL LEASE PAYMENTS: $ 27,549 made at the END of each year LESLIE's (the Lessor's) IMPLIED INTEREST RATE: 4% 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 16 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 4% 4% 5% 4% 5% 3% 4% Rates 3% .97087 .94260 .91514 .88849 .86261 .96154 .92456 .88900 .85480 .82193 1.04000 1.08160 1.12486 1.16986 1.21665 1.05000 .96154 1.10250 1.88609 1.15763 2.77509 1.21551 3.62990 1.27628 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 .es) Focus 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. 9. Are the amounts the same or different in # 7 and #8 and is the answer you come up with correct? (State: SAME/DIFFERENT and CORRECT/WRONG)