3. THE LESSEE'S FINANCE LEASE - the NEW LEASE ACCOUNTING RULES Company A is the Lessee. Company B is the Lessor. Company B rents an asset to Company A for a term of 4 years. The economic life of the asset is 4 years. Therefore, both Company A and Company B conclude that this lease contract is a Finance lease from Company A's point of view. At the end of the lease term the asset is expected to have no residual value and so "residual value" is NOT a relevant matter to prepare the Lessee's accounting. The lease contract provides that lease payments are made in ADVANCE. The four equal annual Lease payments will be $10,000 and they will be made at the beginning of each year. You should describe the three years as YEAR 1, YEAR 2, YEAR 3 and YEAR 4. You should have the lease payments made on 1/1 of each year and each lease year runs from 1/1/to 12/31. The residual value of the lease asset at the end of the lease term is expected to be $10,000 but is not guaranteed. Company B discloses that is implied lease rate is 4%. Use the following table for any Present Value or Annuity Factors you require for calculations: Present Value & Annuity Factors from Chapter 6 of Kleso, et. al.'s Intermediate Accounting 16h Edition YEAR "n" PRESENT VALUE of 1 TABLE 6-2 FUTURE VALUE of 1 Table 6-1 FACTORS PV of ORDINARY ANNUITY of 1 Table 6-4 Payments at End 5% PV of ANNUITY DUE of 1 Table 6-5 Payments at Beginning 3% 4% 3% 4% 4% 5% Discount Rates 4% UN 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 .96154 1.10250 1.88609 1.15763 2.77509 1.21551 3.62990 1.27628 4.45182 .95238 1.00000 1.85941 1.97087 2.72325 2.91347 3.54595 3.82861 4.329484.71710 1.00000 1.96154 2.88609 3.77509 4.62990 1. Calculate the Present Value of th Lease Payments from Company A's perspective as of 1/1/YEAR 1. 2. Calculate the annual amortization expense Company A reports in Earnings on the Rou asset for each of the next 4 fiscal years. Assume Straight Line amortization and no salvage value. THE LESSEE'S FINANCE LEASE (continued) 3. Prepare an Amortization Table for the Lease Obligation shown by Company A. 4. Prepare a Chart that shows the two amounts of expenses Company A will report in its Income Statement every year for this lease and be sure to add a TOTAL column to show the combined impact. 1 5. Estimate the Fair Value of the leased asset from the Lessor's point of view