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E20-6 (Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2025, to lease electronic equipment to
E20-6 (Lessor Entries; Sales-Type Lease with Option to Purchase) Castle Leasing Company signs a lease agreement on January 1, 2025, 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.
- 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.
- Castle Leasing desires to earn a return of 5% on its investment.
- Collectibility of the payments by Castle Leasing is probable.
Instructions
- Prepare the journal entries on the books of Castle Leasing to record the payments received under the lease and to recognize income for the years 2025 and 2026.
- Assuming that Jan Way exercises its option to purchase the equipment on December 31, 2026, prepare the journal entry to record the sale on Castle Leasings books.
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