Question

Exercise 15-30 (Algo) Purchase option; lessor; sales-type lease; no selling profit [LO15-2, 15-6]

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 9% annual rate.
  
The company leased an electronic typesetting machine it purchased for $49,900 to a local publisher, Desktop Inc., on December 31, 2020. The lease contract specified annual payments of $10,249 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 $28,000 when it was expected to have a residual value of $32,000, 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 $10,249 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.

Please help me with this

Answer 1

1. Show how Universal calculated the $10,249 annual lease payments for this sales-type lease.

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Calculation of annual lease payment as follows:

Amount to be recovered:

Purchase price = 49900

Less : PV of sales value at end of lease =28000 * ( 1 / 1+9%)^3 = 28000 * 0.77218 = 21621

Amount to be recovered through lease payment = 49900 – 21621 = 28279

Lease payment at beginning of each year = Amount to be recovered through lease payment / PVAD

PVAD @9%, 3 = 2.75911

Lease payment at beginning of each year = 28279 / 2.75911 = $10249

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2. Prepare an amortization schedule that describes the pattern of interest revenue for Universal Leasing over the lease term.

.

Date	Payment	Interest @9%	Principal Repayment	Balance
Jan 1, 2021				49900
Jan 1, 2021	10249		10249	39651
Dec 31, 2021	10249	3569	6680	32971
Dec 31, 2022	10249	2967	7282	25689
Dec 31, 2023	28000	2312	25688

· The 1 different in Last principal repayment and balance at the end of 2022 is from round off difference.

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3. Prepare the appropriate entries for Universal Leasing from the beginning of the lease through the end of the lease term.

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Date	Accounts	Debit	Credit
2021 Jan 1	Lease Receivable	$49900
	Machinery		$49900
Jan 1	Cash	$10249
	Lease receivable		$10249
Dec 31	Cash	$10249
	Interest revenue		$3569
	Lease receivable		$6680
2022 Dec 31	Cash	$10249
	Interest revenue		$2967
	Lease receivable		$7282
2023 Dec 31	Cash	$28000
	Interest revenue		$2312
	Lease receivable		$25688