Answer:
A. 01-01-2020
Dr Lease receivable $160,000
Dr Cost of goods sold $105,488
Cr Sales $145,488
Cr Inventory $120,000
12/31/20
Dr Cash $78,244
Cr Lease receivable $70,244
Cr Interest revenue $8,000
12/31/21
Dr Cash $78,244
Cr Lease receivable $73,756
Cr Interest revenue $4,488
B. Dec 31,2021
Dr Cash $ 16,000
Cr Sales revenue $ 16,000
Explanation:
Preparation of the journal entries
First step is to Compute the annual payments
Present Value of lease payment
Fair value $160,000
less: present value of residual value $14,512
(16000*0.90703)
Present value of lease payment $145,488
Annual lease payment (145488/1.85941) = $78,244
Present value of $ 1 at 5 % 2 periods = 0.90703
Present value of an ordinary annuity of $ 1 at 5 % 2 periods = 1.85941
Second step is to computer the Lease Amortization Schedule
CASTLE LEASING COMPANY (Lessor)
Lease Amortization Schedule
1/1/20 $160,000
12/31/20 $78,244 $8,000 $70,244 $89,756
12/31/21 $78,244 $4,488 $73,756 $16,000
12/31/21 $16,000 0 $16,000 0
12/31/20
($160,000*5%)=$8,000
$78,244-$8,000=$70,244
$160,000-$70,244=$89,756
12/31/21
($89,756*5%)=$4,488
$78,244 -$4,488=$73,756
$89,756-$73,756=$16,000
Lease Receivable = ($78,244 × 1.85941) + ($16,000 × 0.90703)
Lease Receivable = $160,000
Cost of Goods Sold = $120,000 - ($16,000 × 0.90703)
Cost of Goods Sold= $105,488
Sales Revenue = $160,000 - (16,000 × 0.90703) Sales Revenue = $145,488
Now let prepare the JOURNAL ENTRIES
A. Preparation of 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.
01-01-2020
Dr Lease receivable $160,000
Dr Cost of goods sold $105,488
Cr Sales $145,488
Cr Inventory (given) $120,000
( To record lease )
12/31/20
Dr Cash $78,244
Cr Lease receivable $70,244
Cr Interest revenue $8,000
($160,000*5%)
(To record interest revenue for Dec 2020)
12/31/21
Dr Cash $78,244
Cr Lease receivable $73,756
Cr Interest revenue $4,488
(To record interest revenue for Dec 2021)
B. Preparation of the journal entry to record the sale on Castle Leasing's books.
Dec 31,2021
Dr Cash $ 16,000
Cr Sales revenue $ 16,000
( To record sale on castle leasing's books )
