Exercise NO: 4

Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lea

Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:

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1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease.

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2. The equipment has a cost and fair value of $160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.

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3. Jan Way Company is required to pay $5,000 each year to the lessor for executory costs.

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4. Castle Leasing Company desires to earn a return of 10% on its investment.

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5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

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Instructions

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(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 2014 and 2015.

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(b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31,

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2015, prepare the journal entry to reflect the sale on Castle’s books.

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