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.

Show how Universal calculated the $8,959 annual lease payments for this sales-type lease. (Round your intermediate and final answers to the nearest whole dollar amount.)

	Amount to be recovered Less: Present value of the exercise price Amount to be recovered through periodic lease payments $0 Lease payments at the beginning each of three years $8,959

Prepare an amortization schedule that describes the pattern of interest revenue for Universal Leasing over the lease term. (Round your intermediate and final answers to the nearest whole dollar amount. Enter all amounts as positive values.)

	Lease Amortization Schedule Date Payments Effective Interest Decrease in Balance Outstanding Balance 01/01/2018 12/31/2018 12/31/2019 12/31/2020 Total

Answer 1

Solution

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

Amortization Schedule
Date		Payment		Interest at 11%		Decrease in Balance		Outstanding Balance
1/1/2018								$40,900
1/1/2018		$8,959				$8,959		$31,941
12/31/2018		$8,959		$3,514		$5,445		$26,496
12/31/2019		$8,959		$2,915		$6,044		$20,452
12/31/2020		$22,700		$2,250		$20,450		$0
Total	$49,577		$8,679		$40,898