Question

On January 1, 2021, Rick's Pawn Shop leased a truck from Corey Motors for a six-year period with an option to extend the lease for three years. Rick's had no significant economic Incentive as of the beginning of the lease to exercise the 3-year extension option Annual lease payments are $25,000 due on December 31 of each year, calculated by the lessor using a 45 discount rate. Assume that at the beginning of the third year, January 1, 2023. Rick's had made significant improvements to the truck whose cost could be recovered only if it exercises the extension option, creating an expectation that extension of the lease was reasonably certain The relevant interest rate at that time was 5% (FV of $1. PV of $1. FVA OFS. PVA of $1. FVAD of $1 and PVAD of $3 (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 to account for the reassessment 2. Prepare the journal entry, if any, at the beginning of the third year for the lessor to account for the reassessment. Complete this question by entering your answers in the tabs below. Required Required 2 Prepare the journal entry. If any, at the beginning of the third year for the lessee to account for the reassessment. (If no entry is required for a transaction/event, select 'No journal entry required in the first account field. Round your intermediate and final answers to nearest whole dollar) View transactions Journal entry worksheet Record the improvements to the truck by Rick's. General Journal Debit Credit Date January 01, 2023 < Prev 13 of 13 Next De here to search о нi е на во

Answer 1

Journal Entry

	Debit	Credit
Right to Use	46,642
Accumulated Depreciation	4,196.58
Lease Liability		53,911.95
Depreciation		4,196.58
Interest expense	7,269.83
	58,108.53	58,108.53

Lease working

Interest rate		4%	Dep per year		21,842
Right to use asset and Lease Liability at beginning					1,31,053
Year	Discount Factor@4%	FV	WDV at yearend	Interest	Lease Libility Dec 31
1	0.96154	24,038	1,09,211.18	5,242.14	1,11,295.56
2	0.92456	23,114	87,368.95	4,451.82	90,747.38
3	0.88900	22,225	65,526.71	3,629.90	69,377.28
4	0.85480	21,370	43,684.47	2,775.09	47,152.37
5	0.82193	20,548	21,842.24	1,886.09	24,038.46
6	0.79031	19,758	-	961.54	-0.00
		1,31,053

Revised

Interest rate		5%	Dep per year		19,744
Right to use asset and Lease Liability at beginning					1,77,696
Year	Discount Factor@4%	FV	WDV at yearend	Interest	Lease Libility Dec 31
1	0.95238	23,810	1,57,951.59	8,884.78	1,61,580.32
2	0.90703	22,676	1,38,207.64	8,079.02	1,44,659.33
3	0.86384	21,596	1,18,463.69	7,232.97	1,26,892.30
4	0.82270	20,568	98,719.75	6,344.62	1,08,236.92
5	0.78353	19,588	78,975.80	5,411.85	88,648.76
6	0.74622	18,655	59,231.85	4,432.44	68,081.20
7	0.71068	17,767	39,487.90	3,404.06	46485.26077
8	0.67684	16,921	19,743.95	2,324.26	23,809.52
9	0.64461	16,115	-	1,190.48	-
		1,77,696