Universal Enterprises adopted the policy of leasing as the primary method of selling its products. The company’s main product is a small jet airplane that is very popular among corporate executives. Universal constructed such a jet for Executive Transport Services (ETS) at a cost of $8,329,784. Financing of the construction was at a 13% rate. The terms of the lease provided for annual advance payments of $1,331,225 to be paid over 20 years with the ownership of the airplane transferring to ETS at the end of the lease period. It is estimated that the plane will have a residual value of $800,000 at that date. The lease payments began on October 1, 2008.Universal incurred initial direct costs of $150,000 in finalizing the lease agreement with ETS. The sales price of similar airplanes is $11,136,734.

Instructions:

1. Compute the amount of manufacturer’s profit that will be earned immediately by Universal.

2. Prepare the journal entry to record the lease on Universal’s books at October 1, 2008.

3. Prepare the journal entries to record the lease on Universal’s books for the years 2008–2010 exclusive of the initial entry. Universal’s accounting period is the calendar year.

4. How much revenue did Universal earn from this lease for each of the first three years of the lease?