After reading the prior problem and looking at your accounting for the lease contract with Company B, Company A decides that the FINANCE LEASE format under the new lease accounting rules does not offer a favorable outcome. Company A is particularly concerned about the Front-end loading of lease expenses that threatens to ruin its Income Statement in Year 1.

Company B agrees to modify the lease contract so that it can be accounted for as an OPERATING lease. Company A will lease the asset for 3 years, and the annual lease payments will be increased to $ 15,000. Because the residual value of the asset is NOT guaranteed by the Lessee, it does not enter into the lessees accounting. The lease payments are still paid at the beginning of each year. Company B states in the lease contract that its implied lease rate will remain 3% despite the change in terms.

Company B agrees with Company A that the accounting may be more favorable because the lease expense will be the same number every year.

1. The Fair value of the asset remains unchanged from the previous problem. What must be the residual value at the end of this three-year lease term from the Lessors point of view? Note that this residual value is NOT guaranteed.