AC 302 WEEK 7 Exercise 21 Question 4

AC 302 WEEK 7 Exercise 21 Question 4
  	Your answer is partially correct 	 
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:
1.		Jan Way has the option to purchase the equipment for $16,990 upon termination of the lease.
2.		The equipment has a cost and fair value of $153,400 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,990.
3.		Jan Way Company is required to pay $4,560 each year to the lessor for executory costs.
4.		Castle Leasing Company desires to earn a return of 11% 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.


(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 2014 and 2015. 

(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- books.


Exercise 21-4
(a)		Computation of annual payments		
		Cost (fair value) of leased asset to lessor		$153,400
		Less: Present value of salvage value		
		        (residual value in this case)		
		         $16,990 x 0.81162 (Present value of 1 at 11% for 2 periods)		13,789
		Amount to be recovered through lease payments		$139,611
				
		Two periodic lease payments $139,611 ÷ 1.71252		$81,524