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, 2017. The lease contract specified annual payments of $8,959 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 $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

Universal Leasing

1. Computation to show the calculation of annual lease payments for the sales-type lease:
Since the lease is a direct financing lease,

Total Annual lease payments = fair market value - present value of bargain purchase price at the implicit rate

Fair market value

Fair value of asset leased = $40,900

PV of bargain purchase price calculation,

Bargain purchase price= $22,700

Factor at 3 years, at 11% is = 22,700 x (P/F, 11%, 3) = 22,700 x 0.7312 = $16,598

Amount recovered through payments over 3-year lease term = $40,900 - $16,598 = $24,302

Present value of an annuity due at $1, for 3 years at 11% is = 2.71252

Hence, annual lease payments = $24,302/2.71252 = $8,959.

1.Amortizati schedule that describes the pattern of interest revenue for Universal Leasing over the lease term: