Use Excel to answer questions A-E below. Print your answers for A-E. Then, print the relevant formulas on a separate page.

Bristol Company leased a machine from Harvard Leasing Company on January 1, 2017. The non- cancellable lease term is 4 years.

The following data relate to this lease:

1. Harvard purchased the machine for $363,950 at a cost equal to its fair market value.

2. The economic life of the machine is 6 years with no salvage value at the end of 6 years.

3. Payments are on January 1 of each year starting in 2017 (an annuity due).

4. The annual rental payment is $100,000 which includes $8,000 per year to cover executory costs paid by Harvard Leasing. (i.e., the minimum lease payment is $92,000). The executory costs are for taxes and can vary after the first year if taxes increase.

5. The machine will be returned to Harvard Leasing with an estimated residual value of $40,000 at the end of the lease term.

6. Bristol's incremental borrowing rate per year is 10%.

7.Future costs associated with this lease are predictable and no uncertainties exist about the collectability of lease

payments.

A.How much is the implicit annual interest rate for Harvard Leasing?

Use Column A for descriptive titles. Use Column B to enter data and formulas. In Rows 2-5, enter as data: the fair market value of the leased machine, the minimum lease payment, the residual value, and the number of years in the lease term. In Row 6, use the RATE function and use the data in Rows 2-5. The estimated residual value is "Fv". The present value Pv is the fair market value of the machine multiplied by -1 to make it an outflow of cash. Enter "1" for the Type. Format the result as a percentage with two decimal places. See Hint below.

B. Develop a lease amortization schedule for Bristol similar to the Table shown below assuming that the residual value is guaranteed and that Bristol knows Harvard's implicit interest rate. Bristol estimates that it is probable that the residual value will be $40,000 or more at lease end.

Date

Rental Payment

Executory Cost of Rent

Minimum Lease payment

Interest

Reduction of Lease Liability

Lease Liability

C. Develop a lease amortization schedule for Harvard Leasing Co. similar to Question B above. Record the journal entries for Harvard for 2017.

D. Record the journal entries for Bristol for 2017 assuming the lease is a finance lease for Bristol. Independently, record the journal entries for Bristol for 2017 assuming the lease is an operating lease for Bristol.

E. Now assume that the residual value is not guaranteed by Bristol Company and also that Bristol does not know Harvard's implicit interest rate. Perform the 90% test for Harvard and Bristol. Use the PV function to calculate the present value of the minimum lease payments for both parties. Divide the present value by the fair market value of the machine and report your results as percentages.

Hint: check figures for A:

Cost & Fair Value of Machine 363,950

Minimum Lease Payment 92,000

Estimated Residual Value 40,000

The term of Lease 4

Implicit Rate (Annuity due) 7.00%