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 collectability of lease payments.
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.
(Please show the formulas used in Excel)
Bristol Company leased a machine from Harvard Leasing Company on January 1, 2017. The non-cancellable lease...
Concord Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Marigold Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Marigold Company has the option to purchase the equipment for $16,000 upon termination of the lease. 2. The equipment has a cost and fair value of $157,000 to Concord Leasing Company. The useful economic life...
Bramble Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $268,000. The fair value of the asset at January 1, 2017, is $268,000. 3. The asset will revert to the lessor at the...
The following facts pertain to a noncancelable lease agreement between Sandhill Leasing Company and Teal Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $19,373.99 Bargain-purchase option price at end of lease term $4,400 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $62,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 9 % Lessee’s incremental borrowing rate...
Bramble Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $268,000. The fair value of the asset at January 1, 2017, is $268,000. 3. The asset will revert to the lessor at the...
Pearl Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $311,000. The fair value of the asset at January 1, 2017, is $311,000. 3. The asset will revert to the lessor at the...
CALCULATOR Exercise 21-4 Vaughn Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Bramble Company. The term of the noncancelable case is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Bramble Company has the option to purchase the equipment for $17300 upon termination of the lease 2. The equipment has a cost and fair value of $170,000 to Vaughn Leasing Company. The...
Exercise 21-4 Pronghorn Leasing Company signs a lease agreement on January 1, 2017, to lease electronic equipment to Stellar Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Stellar Company has the option to purchase the equipment for $16,100 upon termination of the lease. 2. The equipment has a cost and fair value of $164,000 to Pronghorn Leasing Company. The useful...
Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $245,000. The fair value of the asset on January 1, 2014, is $245,000. 3. The asset will revert to the lessor at the...
The following facts pertain to a noncancelable lease agreement between Swifty Leasing Company and Nash Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $19,803.59 Bargain-purchase option price at end of lease term $3,900 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $71,000 Fair value of asset at May 1, 2017 $85,000 Lessor’s implicit rate 10 % Lessee’s incremental borrowing rate...
The following facts pertain to a noncancelable lease agreement between Sheridan Leasing Company and Skysong Company, a lessee. Inception date: May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $23,811.51 Bargain-purchase option price at end of lease term $3,900 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $60,000 Fair value of asset at May 1, 2017 $100,000 Lessor’s implicit rate 11 % Lessee’s incremental borrowing rate...