E$21\mathrm{.}6($LO $2,4)($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 eco$-$

nomic 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 $31,2021,$ pre$-$

pare the journal entry to record the sale on Castle Leasing$$s books.