Purchase option; lessor; sales-type lease; no selling profit
• LO15–2, LO15–6
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 10% annual rate. The company leased an electronic typesetting machine it purchased for $30,900 to a local publisher, Desktop Inc. on December 31, 2017. The lease contract specified annual payments of $8,000 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 $12,000 when it was expected to have a residual value of $16,000, a sufficient difference that exercise seems reasonably certain.
Required:
- 1. Show how Universal calculated the $8,000 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.
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