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 $21,000 due on December 31 of each year, calculated by the lessor using a 6% 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 7% (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD OF $ (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 1 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 required for a transaction/event, select "No journal entry required in the first account field. Round your intermediate and to nearest whole dollar) View transaction list Journal entry worksheet

Answer 1

No	Date	General Journal	Debit	Credit
1	Jan 1,2023	Right of use asset	40408
		Lease Payable		40408
2	Jan 1,2023	No entry

Workings:

PV at the inception of lease = 210000 * PVAF (6%, 6 years) = 21000*4.91732 = 103,264

Amortization schedule:

Year	Lease amount	Interest Expense [Carrying amount *6%]	Amortization expense [21000 - Interest expense]	Carrying Amount [ Carrying amount - amortization]
				103,264
1	21000	6196	14804	88,460
2	21000	5308	15692	72,767
3	21000	4366	16634	56,133
4	21000	3368	17632	38,501
5	21000	2310	18690	19,811
6	21000	1189	19811	0

  

PV pf 21000, (PVAF 7% ,7 years)	113175	[21000*5.38929]
Less: Lease balance at the end of 2nd year	72,767
Increase in lease liability	40408

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