Krauss Leasing Company signs a lease agreement on January 1, 2013, to lease electronic equipment to Stewart 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. | Stewart has the option to purchase the equipment for $16,040 upon termination of the lease. | |
| 2. | The equipment has a cost and fair value of $228,700 to Krauss Leasing Company. The useful economic life is 2 years, with a salvage value of $16,040. | |
| 3. | Stewart Company is required to pay $6,580 each year to the lessor for executory costs. | |
| 4. | Krauss Leasing Company desires to earn a return of 8% 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 Krauss Leasing to reflect the payments received under the lease and to recognize income for the years 2013 and 2014.
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