Lessor Entries; Sales-Type Lease with Option to Purchase) 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.

Question

Lessor Entries; Sales-Type Lease with Option to Purchase) 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.

Expert Answer

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Accounting

Related Accounting Q&A

Find answers to questions asked by students like you.

Q: Bramble Inc. declared a cash dividend of $1.15 per share on its 4 million outstanding shares. The di...

A: Cash dividend: The amount of cash provided by a corporation out of its distributable profits to its ...

Q: Elliott Corp. failed to record accrued salaries for 2016,$2,000; 2017, $2,100; and 2018, $3,900. Wha...

A: Accounting error:Accounting errors can be defined as omission of the fundamental accounting principl...

Q: Botticelli Inc. was organized in late 2018 to manufacture and sell hosiery. At the end of its fourth...

A: Click to see the answer

Q: Sanchez Company (seller-lessee) enters into a sale-leaseback to sell its corporate headquarters for ...

A: Sale-Leaseback approach In the sale-leaseback approach, the owner of the leased asset sells it and i...

Q: What are the accounting problems related to the presentationof interim data?

A: Interim data: 

Q: Predetermined overhead rates and manufacturing overhead application (LO 4) Beltran Corporation produ...

A: A.Beltran's predetermined overhead rate for the yearPredetermined overhead rate = Estimated manufact...

Q: (Change in Principle—Long-Term Contracts) Pam Erickson Construction Company changed from the complet...

A: a.Compute net income.

Q: Why is it desirable to use a worksheet when preparing a statement of cash flows? Is a worksheet requ...

A: A Cash flow statement is a financial statement that provides the summarised information regarding ca...

Q: Analyzing and journalizing bond transactions On January 1, 2018, the Doctors Credit Union (DCU) issu...

A: Requirement 1:If the market interest rate is 5% when DCU issues its 7% bonds, the bonds will be pric...

Q: Cost allocation to divisions. Rembrandt Hotel & Casino is situated on beautiful Lake Tahoe in Ne...

A:  Since, there are multiple requirements we will answer only the first three requirements.Requirement...

Q: Variance analysis, multiple products. The Chicago Tigers play in the American Ice Hockey League. The...

A: Sales Volume Variance:The sales volume variance is the difference between the budgeted amount and th...

Q: Explaining financial statements Caleb King is interested in investing in Orange Corporation. What ty...

A: Click to see the answer

Q: If the stock is issued for assets other than cash, describe the recording of this transaction.

A: Stock: It refers to a security issued in a form of certificate. It implies the right of ownership of...

Q: Splish Inc. has outstanding 11,800 shares of $10 par value common stock. On July 1, 2020, Splish rea...

A: Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. Th...

Q: What does the statement of stockholders’ equity report? How does the statement of stockholders’ equi...

A: A financial statement is the complete record of financial transactions that take place in a company ...

Q: What is a short-term lease? Describe lessee accounting for a short-term lease.

A: Short-term LeaseThis is a type of leasing which has a maximum lease term ranging from 1 year or less...

Q: Admitting New Partners Who Buy an Interest and Contribute Assets The capital accounts of Trent Henry...

A: Partnership It is that form of organization which is owned and managed by two or more persons who in...

Q: Determining the effect of stock dividends, stock splits, and treasury stock transactions Many types ...

A: First case: 

Q: What are the accounting problems related to the presentation of interim data?

A: Interim data is the data which covers a period less than the fiscal year.  The data is issued during...

Q: Which item does not appear on a statement of cash flows prepared by the indirect method? Collection...

A: Concept:

Q: Airline pricing, considerations other than cost in pricing. Costal Airways is about to introduce a d...

A: 1.Determine the prices of tickets at different levels of sale.

Q: What accounts on the balance sheet must be evaluated when completing the financing activities sectio...

A: Financing activities: Financing activities refer to the activities carried out by a company to mobil...

Q: The following information was described in a note ofCanon Packing Co.“During August, Holland Product...

A: Disclosures: The additional information which is attached to the entity's financial statements and u...

Q: On January 1, 2017, Jackson Company purchased a building and equipment that have the following usefu...

A: a. Following are the Journal entry and calculation of depreciation expense on building in 2021:

Q: Metheny Corporation's lease arrangements qualify as sales-type leases at the time of entering into t...

A: Sale type leasing: An agreement created between the lessor and the lessee for an amount higher than ...

Q: Classifying cash flow items Consider the following transactions: Purchased equipment for $130,000 c...

A: Click to see the answer

Q: Market-share and market-size variances (continuation of 14-27). Emcee Inc. prepared the budget for 2...

A: Market share variance:Market share variance computes the deviation between the actual market share a...

Q: Describe the three basic types of cash flow activities.

A: Definition:

Q: Whittier Construction Co. had followed the practice of expensing all materials assigned to a constru...

A: In order to show the correct valuation, the entire salvage inventory needs to be evaluated at the ye...

Q: Identifying advantages and disadvantages of a corporation Following is a list of advantages and disa...

A: CorporationA corporation is a form of business entity that is incorporated through the state charter...

Q: Under- and overapplied overhead (LO 6) Kim-Brooks, Inc. makes costumes for movies and television sho...

A: If applied overhead is greater than actual overhead, it is called as under applied overhead; If appl...

Q: Explain the differences in revenue recognition for the lessor in a sales-type lease, a direct financ...

A: (a) Sale-type lease: Under this, revenue is recognized at the beginning of the lease. If the carryin...

Q: Preparing a statement of retained earnings Kingston, Inc. had beginning retained earnings of $135,00...

A: Click to see the answer

Q: Journalizing issuance of stock—stated value Nelson Corporation issued 5,000 shares of $3 stated valu...

A: The stock in which shareholders are entitled to received dividend whose amount may vary from time to...

Q: Analyzing the effect of prior-period adjustments Taylor Corporation discovered in 2019 that it had i...

A: Prior period adjustment: It refers to the adjustment made in the current year to rectify the error m...

Q: Inventory cost flows (LO 3) The following information is taken from the accounting records of four d...

A: Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sel...

Q: If current liabilities increase, what is the effect on cash? What about a decrease in current liabil...

A:  Liabilities: The claims creditors have over assets or resources of a company are referred to as lia...

Q: Cullen Construction Company, which began operations in 2020, changed from the completed-contract to ...

A: (a)Calculate amount of net income that would be reported in 2021:Net income = Income before income t...

Q: Equipment was purchased on January 2, 2017, for $24,000,but no portion of the cost has been charged ...

A: Accounting error: Accounting errors can be defined as omission of the fundamental accounting princip...

Q: Determining the present value of bonds payable and journalizing using the effective-interest amortiz...

A: The presnt value of bond is $ 311580the compnay received $ 311580 as cash.

Q: Journalizing issuance of stock—at par and at a premium Colorado Corporation has two classes of stock...

A: 1.Journalize the issuance of 4,500 shares of common stock for $6 per share for Company C.

Q: Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of...

A: Cash flow statement: Cash flow statement is a main part of financial statement. It is prepared to fi...

Q: Describe the accounting procedures involved in applying the direct financing method by a lessor.

A: Direct financing lease or operational lease method meaning given below: 

Q: Which of the following is not included in continuing operations? Loss on the sale of equipment Gain...

A:  

Q: Cost-hierarchy income statement and allocation of corporate costs to customers. The Insurance Compan...

A: Customer Cost Hierarchy:Customer cost hierarchy is a method that helps in the categorization of cost...

Q: A man received an invoice dated March​ 9, with term 3​/10, ​n/30 amounting to ​$510. He paid the bil...

A: Formula to calculate cash discount:Cash discount = cash amount * Discount rate

Q: What are the major advantages of notes to the financial statements? What types of items are usually ...

A: The major advantages of notes to the financial statements are as follows:Additional information rela...

Q: Broussard Company reported net income of $3.5 million in 2020. Depreciation for the year was $520,00...

A: A Cash flow statement is a financial statement that provides the summarised information regarding ca...