1. Determine what amounts would be reported on the lessees balance sheet and income statement for (a) Year 1, (b) Year 2, and (c) Year 3.

On January 1, Year 1, Conan Company has a piece of equipment with a cost of $295,000 and a fair value of $295,000. On that date, Conan Company leases the asset to Kimmel Company for a 5-year term at an interest rate of 10%. The annual lease payment is due at the beginning of each year, and the first payment is to be collected at the inception date. The leased asset will revert back to Conan Company at the end of the lease term. The equipment has an estimated residual value of $22,250 which is guaranteed by the lessee. The lessee expects the fair value of the asset to be $12,000 at the end of the lease. The lessee has an estimated useful life of 6 years. Both Conan Company and Kimmel Company have a calendar-year reporting period. INSTRUCTIONS Part A. Assume the lease transfers substantially all of the risks and rewards of ownership to Kimmel Company