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.

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, prepare the journal entry to record the sale on Castle Leasing’s books.