Question

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 11% annual rate. The company leased an electronic typesetting machine it purchased for $40,900 to a local publisher, Desktop Inc., on December 31, 2020. The lease contract specified annual payments of $8,959 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 $22,700 when it was expected to have a residual value of $26,700, 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 $8,959 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.

Answer 1

Answer :-

1)

Amount to be recovered	$40,900
Less: Present value of the guaranteed residual value ($22,700 *0.7312)	($16,598)
Amount to be recovered through periodic lease payments	$24,302
Lease payments at the beginning each of three years ($24,302 / 2.71252)	$8,959

present value of $1: n=3, i=11% = 0.7312

present value of an annuity due of $1: n=3, i=11% =2.71252

2)

Lease amortization schedule

Date	payments	effective interest	decrease in balance	outstanding balance
1/1/2021				$40,900
1/1/2021	$8,959		$8,959	$31,941
12/31/2021	$8,959	$3,514	$5,445	$26,496
12/31/2022	$8,959	$2,915	$6,044	$20,452
12/31/2023	$22,700	$2,248	$20,452
Total	$49,577	$8,677	$40,900

Effective Interest = previous outstanding balance*12%

Decrease in balance=payment-effective interest

Outstanding balance= previous outstanding balance-decrease in balance

3)

Date	general journal	debit	credit
Jan. 1 2021	lease receivable	$40,900
	Machinery		$40,900
Jan. 1 2021	cash	$8,959
	Lease receivables		$8,959
Dec. 31 2021	cash	$8,959
	Interest revenue		$3,514
	lease receivable		$2,915
Dec. 31 2022	cash	$8,959
	Interest revenue		$2,915
	Lease receivable		$6,044
Dec 31 2023	cash	$22,700
	Interest revenue		$2,248
	Lease receivable		$20,452