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 leases. Universal earns interest under these arrangements at a 10% annual rate.

The company leased an electronic typesetting machine it purchased on December 31, 2012, for $90,000 to a local publisher, Desktop Inc. The six-year lease term commenced January 1, 2013, and the lease contract specified annual payments of $8,000 beginning December 31, 2013, and each December 31 through 2018. 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 commencement 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 commencement of the lease through the end of 2013.

2. At the beginning of 2014, there was a significant indication that Desktop’s economic incentive to terminate the lease had changed causing both companies to believe the lease will terminate at the end of four years (three years remaining). Prepare the appropriate entries for Universal Leasing at January 1, 2014, to reflect the change in the lease term.

3. Prepare the appropriate entries pertaining to the lease for Universal Leasing at December 31, 2014.

4. Determine the balances in the following accounts pertaining to the lease at December 31, 2013: Lease receivable, residual asset, and asset for lease.

5. Determine the amounts reported in earnings pertaining to the lease during 2013 and during 2014 (ignore taxes).