Question

Q2: Bargain purchase option; lessor;

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. Universal earns interest under these arrangements at a 11% annual rate.

The company leased an electronic typesetting machine it purchased for $47,900 to a local publisher, Desktop Inc., on December 31, 2020. The lease contract specified annual payments of $10,165 beginning January 1, 2021, the inception 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 $27,800 when it was expected to have a residual value of $31,800.

Required: 1. Show how Universal calculated the $10,165 annual lease payments.

Amount to be recovered :                                                                                                             

Less: Present value of the BPO price:                                                  

Amount to be recovered through periodic lease payments:              

Lease payments at the beginning each of three years:                       

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

Lease Amortization Schedule
Date	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
01/01/2021
12/31/2021
12/31/2022
12/31/2023
Totals

3. Prepare the journal entry for Universal Leasing in 2021, 2022, and 2023.

Answer 1

1.)	Amount to be recovered	47,900
	Less: Present value of the BPO Price	20,327	=27800*(1/1.11^3) or 27800*.731191
	Amount to be recovered through periodic lease payments	27,573
	Lease payments at beginning each of three years	10,165	=27573/( 1 + 1.712523)

2.)	Lease Amortization Schedule
	Date	Payments	Effective Interest	Decrease in Balance	Outstanding Balance
					47,900
	01-01-2021	10,165	-	10,165	37,735
	12/31/2021	10,165	4,151	6,014	31,721
	12/31/2022	10,165	3,489	6,676	25,045
	12/31/2023	27,800	2,755	25,045	0
	Totals	58,295	10,395	47,900

3.)	Date	Account Titles	Debit $	Credit $
	01-01-2021	Lease Receivable	47,900
		Cost of goods sold	47,900
		Sales Revenue		47,900
		Equipment		47,900
	01-01-2021	Cash	10,165
		Lease Receivable		10,165
	12/31/2021	Cash	10,165
		Lease Receivable		4,151
		Interest Revenue		6,014
	12/31/2022	Cash	10,165
		Lease Receivable		3,489
		Interest Revenue		6,676
	12/31/2023	Cash	27,800
		Lease Receivable		2,755
		Interest Revenue		25,045