FencePost.com needs additional equipment to expand production capacity. A vendor has suggested a lease plan in which FencePost would make end-of-the-month payments for five years of $3,250. At that point the equipment would be worthless and discarded. The vendor expects to earn a return on this financing arrangement of 9.75% compounded annually. The chief financial officer at FencePost recognizes this arrangement would be accounted for as a capital lease.

Required

A. Use the PV function in an Excel spreadsheet to determine the amount at which the lease would be recorded in the accounting system. List the arguments you inserted into the formula.

B. Show how this transaction would be entered into the accounting system at inception of the lease.

C. Prepare an amortization table for the lease (first four months only).

D. Show the entry that must be made on the date of the first lease payment.

E. Explain how you can tell that the vendor earns a 9.75% rate of return on this transaction.