Question

Check my work Universal Leasing leases electronic equipment to a variety of businesses. The company's primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term sales-type leases. Universal earns interest under these arrangements at a 12% annual rate. The company leased an electronic typesetting machine it purchased for $44,900 to a local publisher, Desktop Inc., on December 31, 2020. The lease contract specified annual payments of $9,626 beginning January 1, 2021, the beginning of the lease, and each December 31 through 2022 (three-year lease term). The publisher had the option to purchase the machine on December 30, 2023, the end of the lease term, for $26,700 when it was expected to have a residual value of $30,700, a sufficient difference that exercise seems reasonably certain. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Show how Universal calculated the $9,626 annual lease payments for this sales-type lease. 2. Prepare an amortization schedule that describes the pattern of interest revenue for Universal 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 term. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Show how Universal calculated the $9,626 annual lease payments for this sales-type lease. (Round your intermediate and

Answer 1

Part 1

Year	PV factor @ 10%	Remarks
0	1.00000
1	0.89286	= 1 / 1.12
2	0.79719	= 0.89286 / 1.12
3	0.71178	= 0.79719 / 1.12
Total (0 to 2)	2.69005

Fair value of equipment	$ 44,900
Less: Present value of purchase option value (26700*0.71178)	$ 19,005
Amount recover through annual lease payments	$ 25,895
Divided : Total Present annuity due Value Factor @ 12% for 3 periods	2.69005
Annual lease payments	$    9,626

Part 2

Universal Leasing Company (Lessor)
Lease Amortization Schedule
Date	Annual Lease Payment	Interest on Lease Receivable	Recovery of Lease Receivable	Balance of Lease Receivable
Jan 1, 2021				$       44,900
Jan 1, 2021	$          9,626	$                 0	$          9,626	$       35,274
Dec 31, 2021	$          9,626	$         4,233	$          5,393	$       29,881
Dec 31, 2022	$          9,626	$         3,586	$          6,040	$       23,841
Dec 31, 2023	$        26,700	$         2,859	$        23,841	$                -
Total	55,578	10,678	44,900
Last year's interest adjusted

Interest on Lease Receivable = Beginning Balance of Lease Receivable * 12%

Recovery of Lease Receivable = Annual Lease Payment - Interest on Lease Receivable

Balance of Lease Receivable = Beginning Balance of Lease Receivable - Recovery of Lease Receivable

Part 3

Date	Accounts titles and explanation		Debit	Credit
Jan 1, 2021	Lease receivable		44,900
	Equipment			44,900
	(To record lease agreement for direct finance.)
Jan 1, 2021	Cash		9,626
	Lease receivable			9,626
	(To record lease receipt.)
Dec 31, 2021	Cash		9,626
	Interest revenue			4,233
	Lease receivable			5,393
	(To record lease receipt.)
Dec 31, 2022	Cash		9,626
	Interest revenue			3,586
	Lease receivable			6,040
	(To record lease receipt.)
Dec 31, 2023	Cash		26,700
	Interest revenue			2,859
	Lease receivable			23,841
	(To record the exercise of purchase option.)