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 leases. Universal earns interest under these arrangements at a 12% annual rate. Universal purchased an electronic typesetting machine on December 31, 2020, for $98,000 and then leased it to Desktop, Inc., a local publisher. The six-year operating lease term commenced January 1, 2021, and the lease contract specified annual payments of $8,800 beginning December 31, 2021, and on each December 31 through 2026. The machine's estimated useful life is 15 years with no estimated residual value. The publisher had the option to terminate the lease after four years. At the beginning of the lease, there was no reason to believe the lease would be terminated. Required: 1. Prepare the appropriate entries for Universal Leasing from the beginning of the lease through the end of 2021. 2. At the beginning of 2022, there was a significant indication that Desktop's economic incentive to terminate the lease had changed causing both companies to believe termination of the lease at the end of four years (three years remaining) is "reasonably certain." Prepare any appropriate entry for Universal Leasing at January 1, 2022, to reflect the change in the lease term. 3. Prepare the appropriate entry pertaining to the lease for Universal Leasing at December 31, 2022. Complete this question by entering your answers in the tabs below.

Answer 1

Universal Leasing Requirement 1 Journal Enteries Date Particulars 1.1.2021 No journal entry required Debit in $ Credit in $ 8800 31.12.2021 Cash a/c Dr. To Lease revenue (Lease revenue received) 8800 Requirement 2 Journal Enteries Date Particulars 1.1.2022 No journal entry required Debit in $ Credit in $ The lease term now is expected to be four years, three years remaining after the first year. It still is considered an operating lease.Lease revenue continues to be $8,800 per year, but now for three remaining years rather than five years Requirement 3 8800 31.12.2022 Cash a/c Dr. To Lease revenue (Lease revenue received) 8800