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 $39,900 to a local publisher, Desktop Inc., on December 31, 2020. The lease contract specified annual payments of $8,617 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 $22,600 when it was expected to have a residual value of $26,600, 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 $8,617 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

1)
Amount to be recovered	$                                                39,900.00
Less: Present value of the guaranteed residual value 22,600 x PV(11%,3)	$16,524.93
Amount to be recovered through periodic lease payments	$                                                23,375.07
PVAD (11%,3)	2.7125
Lease payments at the beginning each of three year	$                                                       8,617
2)
Amortization Schedule
Date	Payment	Inteest@ 11%	Principal	Balance
1-Jan-21				$ 39,900.00
1-Jan-21	$                                                  8,617.00		$   8,617.00	$ 31,283.00
31-Dec-21	$                                                  8,617.00	$           3,441.13	$   5,175.87	$ 26,107.13
31-Dec-22	$                                                  8,617.00	$           2,871.78	$   5,745.22	$ 20,361.91
31-Dec-23	$                                                22,600.00	$           2,238.09	$ 20,361.91	$          0.00
3)
Date	Account Titles & Explanations	Debit	credit
1-Jan-21	Lease receivable	$         39,900.00
	Machinery		$ 39,900.00
1-Jan-21	Cash	$           8,617.00
	Lease receivable		$   8,617.00
31-Dec-21	Cash	$           8,617.00
	Interest Revenue		$   3,441.13
	Lease receivable		$   5,175.87
31-Dec-22	Cash	$           8,617.00
	Interest Revenue		$   2,871.78
	Lease receivable		$   5,745.22
31-Dec-23	Cash	$         22,600.00
	Interest Revenue		$   2,238.09
	Lease receivable		$ 20,361.91