on relates to this agreement. rchase the equipment for $16, at Jan Way will exercise this o 120,000 and fair value of $16 a residual value of $16,000.
on relates to this agreement. rchase the equipment for $16, at Jan Way will exercise this o 120,000 and fair value of $16 a residual value of $16,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:E21.6 (LO 3) (Lessor Entries, Sales-Type Lease with Option to Purchase) Castle Leasing
Company signs a lease agreement on January 1, 2022, 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,o00 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.
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 2022 and 2023.
b. Assuming that Jan Way exercises its option to purchase the equipment on December 31, 2023,
prepare the journal entry to record the sale on Castle Leasing's books.
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