Question

Universal Leasing leases electronic equipment to a variety of businesses. The company's primary service is pro- E 15-30 Purchase option: viding alenate financing by acquiring equipment and leasing it to customers under long-term sales-type leases. lessor; sales-type Universal eams interest under these arrangements al a 10% annual rate. lease; no selling The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop profit Inc. on December 31, 2017. The lease contract specified annual payments of $8,000 beginning January 1,2018, LO15-2, LO15-6 the beginning of the lease, and each December 31 through 2019 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2020, the end of the lease term, for $12.000 when it was expected to have a residual value of $16,000, a sufficient difference that exercise seems reasonably certain Required: 1. Show how Universal calculated the $8,000 annual lease payments for this sales-type lease 2. Prepare as amortization schedule that describes the patlem of interest revenue for Univenal Leasing over the lease term. 3. Prepare the appropriate entries for Universal Leasing from the beginning of the lease through the end of the lease lerm.

Answer 1

Year	Present value factor @ 10%
0	1.00000
1	0.90909
2	0.82645
3	0.75131
Total (0 to 2)	2.73554
Cost of New Machine	$            30,900
Less: Present value of purchase option value (12000*0.75131)	$              9,016
Amount recover through annual lease payments	$            21,884
Divided : Total Factor (as above)	2.73554
Annual lease payments	$              8,000

Lease amortization table - lessor
Period	Beginning balance of lease receivable	Lease receipt	Interest revenue (Beginning balance of lease receivable* 10%)	Reduction in lease receivable (Lease receipt - Interest revenue)	Ending balance of lease receivable (Beginning balance of lease receivable - Reduction in lease receivable)
Jan 1, 2018	$            30,900	$          8,000	$                          -	$                      8,000	$                                22,900
Dec 31, 2018	$            22,900	$          8,000	$                   2,290	$                      5,710	$                                17,190
Dec 31, 2019	$            17,190	$          8,000	$                   1,719	$                      6,281	$                                10,909
Dec 31, 2020	$            10,909	$        12,000	$                   1,091	$                   10,909	$                                          0

Journal entries
Date	General Journal	Debit	Credit
Dec 31, 2017	Lease receivable	30,900
	Cost of goods sold	30,900
	Inventory		30,900
	Sales revenue		30,900
	(To record lease agreement for sales-type lease.)
Jan 1, 2018	Cash	8,000
	Lease receivable		8,000
	(To record lease payment.)
Dec 31, 2018	Cash	8,000
	Lease receivable		5,710
	Interest revenue		2,290
	(To record lease payment.)
Dec 31, 2019	Cash	8,000
	Lease receivable		6,281
	Interest revenue		1,719
	(To record lease payment.)
Dec 31, 2020	Cash	12,000
	Lease receivable		10,909
	Interest revenue		1,091
	(To record purchase option exercised by leasee.)