Indra: Lots. We purchased equipment costing $8,000,000 this year and we are now leasing 3 new forklifts over a 4-year lease term with semi-annual payments on March 1 and September 1 commencing when the company entered the lease on March 1, 20X3. Wayne decided to lease them without my permission, which is one of the reasons he is no longer here. What really upset me about this was that he didn't even try to find out what the interest rate implicit in the lease was. I know that our company can borrow funds at the bank for only 4% to buy forklifts. Luckily when the owner tried to get Wayne to guarantee the residual value of $7,236 for each forklift, he refused, and he also refused to have a purchase option embedded in the lease agreement. I know that the fair value of each forklift is $80,000 and that each payment is $33,200 for all 3 forklifts due every 6 months at the beginning of each six-month period. I also know that forklifts like these should last for 7 years. Thanks, I now have enough information to deal with the lease, but could you tell me about your bank loan?

  

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EXHIBIT I STATEMENT OF INCOME YEAR ENDED AUGUST 31 20X3 20X2 Draft Audited Sales $ 34,800,000 $ 25,600,000 Cost of goods sold Gross profit 16,000,000 9,600,000 21,600,000 13,200,000 Expenses: Wages 1,400,000 1,912,000 2,400,000 General and administrative 2,827,200 Depreciation expense Pension expense 1,500,000 1,200,000 560,000 320,000 Warranty expense 180,000 7,467,200 4,832,000 Income from operations 5,732,800 4,768,000 Interest on bank loan (32,000) (232,000) (144,000) (371,632) 4,985,168 Interest on bonds Bond redemption expense Net income before income tax 4,736,000 Tax expense - current 1,440,000 1,676,000 Tax expense - deferred 84,000 1,760,000 $_2,976,000 1,440,000 Net income $_ 3,545,168 EXHIBIT I STATEMENT OF INCOME YEAR ENDED AUGUST 31 20X3 20X2 Draft Audited Sales $ 34,800,000 $ 25,600,000 Cost of goods sold Gross profit 16,000,000 9,600,000 21,600,000 13,200,000 Expenses: Wages 1,400,000 1,912,000 2,400,000 General and administrative 2,827,200 Depreciation expense Pension expense 1,500,000 1,200,000 560,000 320,000 Warranty expense 180,000 7,467,200 4,832,000 Income from operations 5,732,800 4,768,000 Interest on bank loan (32,000) (232,000) (144,000) (371,632) 4,985,168 Interest on bonds Bond redemption expense Net income before income tax 4,736,000 Tax expense - current 1,440,000 1,676,000 Tax expense - deferred 84,000 1,760,000 $_2,976,000 1,440,000 Net income $_ 3,545,168