ACCT 304 Chapter 16 QUIZ

ACCT 304 Chapter 16 QUIZ
E21 4 Lessor Entries Direct Financing Lease with Option to Purchase
 Krauss Leasing Company signs
a lease agreement on January 1, 2012, 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 $16,000 upon termination of the lease.
2. 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.
3. Stewart Company is required to pay $7,000 each year to the lessor for executory costs.
4. Krauss Leasing Company desires to earn a return of 10% 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.

Instructions
(Round amounts to the nearest cent.)
(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 2012 and 2013.
(b) Assuming that Stewart Company exercises its option to purchase the equipment on December 31,
2013, prepare the journal entry to reflect the sale on Krauss- books.