Krauss Leasing Company signs a lease agreement on January 1, 2011, 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:
- Stewart Company has the option to purchase the equipment for $16,000 upon the termination of the lease.
- The equipment has a cost and fair value of $240,000 to Krauss Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000.
- Stewart Company is required to pay $7,000 each year to the lessor for executory costs.
- Krauss Leasing Company desires to earn a return of 10% on its investment.
- Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions: 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 2011 and 2012.