Why is there Jannah & Jahannam in Islam?

Why is there Jannah and Jahannam in Islam?
If Allah is Merciful then why does He Punish People?
My non-muslim friend asked me, why is the Jannah and jahannam in Islam?
if Allah is merciful then why does he punish people in Hell Fire for committing shirk.

so basically the brother has two questions why is the Jannah and jahannam and the second question that why does Allah سُبْحَانَهُ وَتَعَالَىٰ punish people for committing shirk.

the first question regarding Jannah and jahannam, Allah سُبْحَانَهُ وَتَعَالَىٰ he has created us human beings, he has given us human beings a free will this life it is a test for the Hereafter, Allah says

الَّذِي خَلَقَ الْمَوْتَ وَالْحَيَاةَ لِيَبْلُوَكُمْ أَيُّكُمْ أَحْسَنُ عَمَلًا ۚ وَهُوَ الْعَزِيزُ الْغَفُورُ
He Who created Death and Life, that He may try which of you is best in deed: and He is the Exalted in Might, Oft-Forgiving;-
[67:2]

it is Allah who has created death and life to test which of your God indeeds, this life it is a test for the hereafter and based on our Good Deeds, based on our righteous Deeds, we will enter into The Gardens of paradise, there are various levels of Jannah, the highest it is Jannatul Ferdous and if you do bad Deeds, we will go into Hell Fire Allah سُبْحَانَهُ وَتَعَالَىٰ he has given us a free will.

So our reward the reward for our Good Deeds it is Jannah and I would like to give you a simple example,