Question

Castle Leasing Company signs a lease agreement on January 1, 2017, 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: 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. 1. 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 an unguaranteed residual value of $16,000. Castle Leasing desires to earn a return of 5% on its investment. 3. 4. Collectibility of the payments by Castle Leasing is probable. Click here to view the factor table. Z Your answer is partially correct. Try again. 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 2017 and 2018. (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.) Account Titles and Explanation Credit Date Debit 160000 Lease Receivable 1/1/17 Cost of Goods Sold 105488 11512 Sales Revenue 120000 Inventory 78244 12/31/17 | Cash Lease Receivable 70244 8000 Interest Revenue 78244 12/31/18 + Cash

Answer 1

Present value of lease payment
Fair value					160000
less: present value of residual value (16000*0.90703)					14512
Present value of lease payment					145488
annual lease payment (145488/1.85941) = 78244
Journal entries
Date	Particulars			Debit	Credit
01-01-2017	lease receivable			160000
	cost of goods sold			105488
	sales				145488
	inventory				120000
12/31/17	cash			78244
	lease receivable				70244
	interest revenue (160000*5%)				8000
12/31/18	cash			78244
	lease receivable				73756
	interest revenue (160000-70244)*5%				4488

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