The following memo and supporting documents serve to inform the Executive Committee regarding the effects on the financial statement and general ledger of a new lease arrangement and new bond issuance entered into at the beginning of this month. We have entered into a seven-year lease as the lessee (Reynolds Corporation is the lessor) on a piece of scientific equipment with a fair value of $105,000. The lease must be treated as a finance lease because the equipment's fair value exceeds the present value of minimum lease payments. Finance leases require that we record both an asset and a liability on our balance sheet beginning this year, but compared to an operating lease the finance lease will result in lower cash flows from operations in Year 1 of $5,545. Our annual payments total $16,200 and for Year 1, consisting of $5,545 in interest and $10,655 in principal. For Year 2, we will pay $5,070 in interest and $11,130 in principal. The only impact on the income statement related to the lease liability will be the interest component of the payments, while the principal component will serve to reduce the liability on our books. The annual amortization expense associated with the