On January 1, 2018, Ricks Pawn Shop leased a truck from ChumleyMotors ...

On January 1, 2018, Rickâ€™s Pawn Shop leased a truck from Chumley Motors for a six-year...

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Accounting

On January 1, 2018, Rickâ€™s Pawn Shop leased a truck from ChumleyMotors for a six-year period with an option to extend the lease forthree years. Rickâ€™s had no significant economic incentive as of thebeginning of the lease to exercise the 3-year extension option.Annual lease payments are $27,000 due on December 31 of each year,calculated by the lessor using a 4% discount rate. Assume that atthe beginning of the third year, January 1, 2020, Rickâ€™s had madesignificant improvements to the truck whose cost could be recoveredonly if it exercises the extension option, creating an expectationthat extension of the lease was â€œreasonably certain.â€ The relevantinterest rate at that time was 5%. (FV of $1, PV of $1, FVA of $1,PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s)from the tables provided.) Required: 1. Prepare the journal entry,if any, at the beginning of the third year for the lessee toaccount for the reassessment.

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Solution 1 No Date General Journal Debit Credit 1 Jan 1 2020 Right of use asset 58227 Lease Payable 58227 January 1 2018 Lease payable 27000 PVIF 1 n6 i4 Lease payable 27000 52421 141537 December 31 2018 Interest expense 4 141537 5661 Amortization expense 27000 5661 21339 In an operating lease the lessee records See Answer

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