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 11% annual rate.

Universal purchased an electronic typesetting machine on December 31, 2020, for $99,000 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 $8,900 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.

Answer 1

Required 1 :
In January 1, 2021 , There is No Entry is required to record the lease an Operating Lease
Date	Accounts Title and Explanation	Debit	Credit
December 31,2021	Cash	$ 8,900
	Lease Revenue		$ 8,900
	(To record Receipts of Lease Payment )
Required 2 :
No Entry is to be recorded on January 1,2022
It is still a Operating Lease even the lease term is to be Changed. The Lease Revenue continues to be
$ 8,000 Per Year . It is only Effect remaining years From 5 Years to 3 Years ( i.e
Required 3 :
Date	Accounts Title and Explanation	Debit	Credit
December 31,2022	Cash	$ 8,900
	Lease Revenue		$ 8,900
	(To record Receipts of Lease Payment )