Universal Leasing leases electronic equipment to a variety ofbusinesses. The company’s primary service is providing alternatefinancing by acquiring equipment and leasing it to customers underlongterm leases. Universal earns interest under these arrangementsat a 12% annual rate.

Universal purchased an electronic typesetting machine on December31, 2017, for $104,000 and then leased it to Desktop, Inc., a localpublisher. The six-year operating lease term commenced January 1,2018, and the lease contract specified annual payments of $9,400beginning December 31, 2018 and each December 31 through 2023. Themachine’s estimated useful life is 15 years with no estimatedresidual value.

The publisher had the option to terminate the lease after fouryears. At the beginning of the lease, there was no reason tobelieve the lease would be terminated.

Required:

1. Prepare the appropriate entries forUniversal Leasing from the beginning of the lease through the endof 2018.
2. At the beginning of 2019, there was asignificant indication that Desktop’s economic incentive toterminate the lease had changed causing both companies to believetermination of the lease at the end of four years (three yearsremaining) is “reasonably certain”. Prepare any appropriate entriesfor Universal Leasing at January 1, 2019, to reflect the change inthe lease term.
3. Prepare the appropriate entries pertaining tothe lease for Universal Leasing at December 31, 2019.