Question

In: Accounting

10) Universal Leasing leases electronic equipment to a variety of businesses. The company’s primary service is...

10) 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 10% annual rate.
  
The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop Inc. on December 31, 2017. The lease contract specified annual payments of $8,000 beginning January 1, 2018, 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. (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 $8,000 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.
  

Solutions

Expert Solution

1 and 2

PV Interest Installment Balance
30900 0        (8,000)        22,900
       22,900        6,227        (8,000)        21,127
       21,127        5,744        (8,000)        18,871
       18,871        5,131        (8,000)        16,002

3.(a) Lease Receivable a/c Dr. 30900

To Sales a/c 30900

(b)Bank a/c Dr. 8000

To Lease Receivable 8000

(c) Lease Receivable a/c Dr. 6227/ 5744/ 5131

To Interest Income

(d) Bank a/c Dr. 8000

To Lease Receivable 8000


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