Question

File Edit Preview View Go Tools Window + Q Help C Sat 504 PM Qe Screen Shot 2020-02-08 5.02.45 PM E21.6 (LO 2, 4) (Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2020, to lease electronic equipment to Jan Way Company. The term of the non-cancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement. 1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease. It is not reasonably certain that Jan Way will exercise this option. 2. The equipment has a cost of $120,000 and fair value of $160,000 to Castle Leasing. The useful eco- nomic life is 2 years, with a residual value of $16,000. 3. Castle Leasing desires to earn a return of 5% on its investment. 4. Collectibility of the payments by Castle Leasing is probable. Instructions a. Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. b. Assuming that Jan Way exercises its option to purchase the equipment on December 31, 2021, pre- pare the journal entry to record the sale on Castle Leasing's books.

Answer 1

REQUIRED 1 :
Date	General journal	Debit	Credit
Jan 1,2020	Lease receivable (see note 2)	$ 160,000
	Cost of goods sold ( see note 2 )	$ 105,488
	Sales (see note 2 )		$ 145,488
	Inventory (given )		$ 120,000
	( to record lease )
Dec 31,2020	Cash ( see note 1)	$ 78,244
	Lease receivable ( see note 2 )		$ 70,244
	Interest revenue (see note 2 )		$ 8,000
	(to record interest revenue for Dec 2020)
Dec 31,2021	Cash ( see note 1)	$ 78,244
	Lease receivable ( see note 2 )		$ 73,756
	Interest revenue (see note 2 )		$ 4,488
	(to record interest revenue for Dec 2021)
REQUIRED 2 :
Date	General journal	Debit	Credit
Dec 31,2021	Cash	$ 16,000
	Sales revenue		$ 16,000
	( to record sale on castle leasing's books )

Note 1
Computation of annual payments :
Fair value of leased asset to lessor	$ 160,000
less: Present value of residual value	($ 14,512)
($16,000 * 0.90703 )
Amount to be recovered through lease payments	$ 145,488
Two periodic lease payments ($ 145,488 /1.85941)	$ 78,244
Present value of $ 1 at 5 % 2 periods is 0.90703
Present value of an ordinary annuity of $ 1 at 5 % 2 periods is 1.85941

Note 2:
CASTLE LEASING COMPANY (lessor)
Amortization schedule
Date	Annual payments	Interest	Recovery of lease receivable	Lease Receivable
Jan 1,2020				$ 160,000
Dec 31,2020	$ 78,244	$ 8,000   {$160,000*5%}	$ 70,244              {78,244 -8000}	$ 89,756 {160,000-70244}
Dec 31,2021	$ 78,244	$ 4,488   {$89,756*5%}	$ 73,756              {78,244 -4,488}	$16,000 {$89,756-$73,756}
Dec 31,2021	$ 16,000	$ 0	$ 16,000	$ 0
Lease receivable = ($78,244*1.85941)+($16,000*0.90703)= $ 160,000
Cost of goods sold ={ $ 120,000 - ($16,000 *0.90703)}= $ 105,488
Sales revenue = {$ 160,000 - ($16,000 -0.90703 ) }= $ 145,488