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

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

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.

3.Jan Way Company is required to pay $5000 each year to the lessor for executory costs.

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

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

Directions:

a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the ease and to recognize income for the years 2014 and 2015:

1/1/14

12/31/14

12/31/15

b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31, 2015, prepare the journal entry to reflect the sale on Castle's books.