Question

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 economic 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.

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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Answer 1

Credit Debit $ 160,000 $ 105,488 Date Account titles and Explanation 01/01/20 Lease receivable Cost of goods sold Sales revenue Inventory (to record lease receivable) $ $ 145,488 120,000 $ 78,244 12/31/20 Cash Lease receivable (78,244 - 8,000) Interest revenue (160,000 5%) (to record interest income) $ $ 70,244 8,000 $ $ 78,244 12/31/21 Cash Lease receivable (78,244 - 4,488) Interest revenue [(160,000 - 70,244) 5%] (to record interest income) $ $ 73,756 4,488

$ Residual Value Present of $1 , n=2 , i=5% Present value of Residual Value ($16,000 0.90703) 16,000 0.90703 14,512 $ $ $ Present value of Lease payment Fair Value Less: Present value of Residual Value Present Value of Lease payment 160,000 (14,512) 145,488 $ $ $ Annual Lease payment Present Value of Lease payment Present value of annuity $ 1, n=2, i=5% Annual Lease payment ($ 145,488 / 1.85941) 145,488 1.85941 78,244 $ $ $ Cost of Equipment Sold Cost Price Less: Present value of Residual Value Present Value of Lease payment 120,000 (14,512) 105,488 $

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