5. On January 1, 2018, 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 incentives as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. The useful life of the truck is 9 years, and the cost of the truck is $70,000. Assume that at the end of the second year, January 1, 2020, 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 6%. Required: Prepare the journal entry, if any, at the end of the second year for the lessee to account for the reassessment. Prepare the journal entry, if any, at the end of the second year for the lessor to account for the reassessment. ●

5. On January 1, 2018, 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 incentives as of the beginning of the lease to exercise the 3-year extension option. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. The useful life of the truck is 9 years, and the cost of the truck is $70,000. Assume that at the end of the second year, January 1, 2020, 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 6%. Required: Prepare the journal entry, if any, at the end of the second year for the lessee to account for the reassessment. Prepare the journal entry, if any, at the end of the second year for the lessor to account for the reassessment. ●

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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