Exercise 21-4 Castle Leasing Company signs a lease agreement on January 1, 2014,
ID: 2427666 • Letter: E
Question
Exercise 21-4
Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement:
Date
Account Titles and Explanation
Debit
Credit
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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 0.527552 and the final answers to 0 decimal places e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
12/31/15
1. Jan Way has the option to purchase the equipment for $16,440 upon termination of the lease. 2. The equipment has a cost and fair value of $173,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,440. 3. Jan Way Company is required to pay $4,800 each year to the lessor for executory costs. 4. Castle Leasing Company desires to earn a return of 9% on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.Explanation / Answer
Answer A Journal entries in the books of Castle Leasing (Lessor) Date Particulars Debit Credit 01/01/2014 No entry 31/12/2014 Executory Cost 4800 Cash 4800 (Cost Incurred) 31/12/2014 Jan Way 20370 Lease Rental/Interest (9% of $173000) 15570 Executory Cost 4800 (Lease rental / interest with executory cost for 1st year become due) 31/12/2014 Cash 20370 Jan Way 20370 (Lease rental / interest received) 31/12/2014 Depreciation {(173000-16440) / 2} 78280 Accumulated depreciation 78280 (Depreciation calculated on straight line basis) 31/12/2015 Executory Cost 4800 Cash 4800 (Cost Incurred) 31/12/2015 Jan Way 20370 Lease Rental/Interest (9% of $173000) 15570 Executory Cost 4800 (Lease rental / interest with executory cost for 2nd year become due) 31/12/2015 Cash 20370 Jan Way 20370 (Lease rental / interest received) 31/12/2015 Depreciation 78280 Accumulated depreciation 78280 (Depreciation calculated on straight line basis) Answer B Journal entries in the books of Castle Leasing (Lessor) when Jan way exercises the option of purchase Date Particulars Debit Credit 31/12/2015 Cash 16440 Accumulated depreciation 156560 Equipment 173000 (Equipment transferred to Jan way)
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