Chapter 18, Problem 1FSC

Financial Statement Analysis Case

You are reviewing the financial statements of Trident Incorporated and observed that Trident entered into a significant operating lease for office equipment at the end of the current year. Because of the nature of items leased and the length of the lease, you question the classification of the leases as operating. You are interested in assessing the income statement effect of classifying the lease as an operating versus a finance lease. Trident disclosed the following schedule of its lease payments.

Year	Future Lease Payments
2019	$750,000
2020	750,000
2021	750,000
2022	750,000
2023	750,000
Thereafter	3,750,000
Total lease payments	7,500,000
Less imputed interest	2,891,575
Present value of future lease payments	$4,608,425

Given that lease payments in each of the next 5 years total $750,000, you assume that lease payments going forward are also $750,000 per year. To determine the lease term, you divide the total payments of $3,750,000 after 2023 by $750,000 per year to compute an additional 5 years of lease payments after 2023. Therefore, the total lease term is 10 years. You also determine that Trident’s discount rate is 10%.

Use Trident’s information to determine its expenses in 2019, 2020, and 2021 related to its operating lease. Determine what the lease expense would be if Trident classified the lease as a finance lease. Assume lease payments occur at the end of each year.