Universal Leasing leases electronic equipment to a variety of businesses. The co
ID: 2328534 • Letter: U
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 longterm leases. Universal earns interest under these arrangements at a 12% annual rate.
Universal purchased an electronic typesetting machine on December 31, 2017, for $104,000 and then leased it to Desktop, Inc., a local publisher. The six-year operating lease term commenced January 1, 2018, and the lease contract specified annual payments of $9,400 beginning December 31, 2018 and each December 31 through 2023. The machine’s estimated useful life is 15 years with no estimated residual value.
The publisher had the option to terminate the lease after four years. At the beginning of the lease, there was no reason to believe the lease would be terminated.
Required:
1. Prepare the appropriate entries for Universal Leasing from the beginning of the lease through the end of 2018.
2. At the beginning of 2019, there was a significant indication that Desktop’s economic incentive to terminate the lease had changed causing both companies to believe termination of the lease at the end of four years (three years remaining) is “reasonably certain”. Prepare any appropriate entries for Universal Leasing at January 1, 2019, to reflect the change in the lease term.
3. Prepare the appropriate entries pertaining to the lease for Universal Leasing at December 31, 2019.
Explanation / Answer
Q1
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
January 01, 2018
Desktop Inc.
38,647.23
Typesetting machine
38,647.23
(Being the machined given on lease)
December 31, 2018
Desktop Inc. (38647.23 x 12%)
4,637.67
Interest on lease
4,637.67
(Being interest on amount receivable is recorded)
Cash
9,400.00
Desktop Inc.
9,400.00
(Being lease rental received)
Interest on lease
4,637.67
Profit and loss account
4,637.67
(Being interest credited to profit and loss account)
Q2
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
January 01, 2019
Type setting machine (5333.812+4762.333)
10,096.14
Desktop Inc.
10,096.14
(Being lease rental cancelled for year 5th and 6th)
Q3
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
December 31, 2019
Desktop Inc. {(38647.23+4637.67)- (10096.145+9400.00)} x 12%
2,854.65
Interest on lease
2,854.65
(Being interest on amount receivable is recorded)
Cash
9,400.00
Desktop Inc.
9,400.00
(Being lease rental received)
Interest on lease
2,854.65
Profit and loss account
2,854.65
(Being interest credited to profit and loss account)
Note 1:
Year
Annual lease rent
PV factor @12%
Present value of lease rent
1
9400
0.892857
8392.857
2
9400
0.797194
7493.622
3
9400
0.71178
6690.734
4
9400
0.635518
5973.87
5
9400
0.567427
5333.812
6
9400
0.506631
4762.333
Present value of total lease rent
38647.23
Q1
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
January 01, 2018
Desktop Inc.
38,647.23
Typesetting machine
38,647.23
(Being the machined given on lease)
December 31, 2018
Desktop Inc. (38647.23 x 12%)
4,637.67
Interest on lease
4,637.67
(Being interest on amount receivable is recorded)
Cash
9,400.00
Desktop Inc.
9,400.00
(Being lease rental received)
Interest on lease
4,637.67
Profit and loss account
4,637.67
(Being interest credited to profit and loss account)
Q2
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
January 01, 2019
Type setting machine (5333.812+4762.333)
10,096.14
Desktop Inc.
10,096.14
(Being lease rental cancelled for year 5th and 6th)
Q3
Date
Account titles and explanations
Debit ($' million)
Credit ($' million)
December 31, 2019
Desktop Inc. {(38647.23+4637.67)- (10096.145+9400.00)} x 12%
2,854.65
Interest on lease
2,854.65
(Being interest on amount receivable is recorded)
Cash
9,400.00
Desktop Inc.
9,400.00
(Being lease rental received)
Interest on lease
2,854.65
Profit and loss account
2,854.65
(Being interest credited to profit and loss account)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.