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On January 1, 2024, 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 three-year extension option. Annual lease payments are $13,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. The expected useful life of the asset is nine years, and its fair value is $97,500. Assume that at the beginning of the third year, January 1, 2026, 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% Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. 2. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Required 1 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. Note: 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. Show less

On January 1, 2024, 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 three-year extension option. Annual lease payments are $13,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. The expected useful life of the asset is nine years, and its fair value is $97,500. Assume that at the beginning of the third year, January 1, 2026, 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% Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. 2. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Required 1 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. Note: 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. Show less

FINANCIAL ACCOUNTING
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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On January 1, 2024, 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 three-year extension option. Annual lease payments are $13,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. • The expected useful life of the asset is nine years, and its fair value is $97,500. Assume that at the beginning of the third year, January 1, 2026, 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%. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. 2. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Required 1 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. Note: 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 transaction list View journal entry worksheet No Date January 01, General Journal Debit Credit 1 2020 Right-of-use asset Lease payable 2 December 31, 2026 Interest expense Amortization expense 3 December 31, 2020 Interest expense Amortization expense Show less A Required 2 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Note: 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 transaction list View journal entry worksheet No 1 Date January 01, 2028 General Journal Debit Credit Interest expense Lease payable Cash December 31, 2 Amortization expense 2026 Right-of-use asset Show less
Transcribed Image Text:On January 1, 2024, 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 three-year extension option. Annual lease payments are $13,000 due on December 31 of each year, calculated by the lessor using a 4% discount rate. • The expected useful life of the asset is nine years, and its fair value is $97,500. Assume that at the beginning of the third year, January 1, 2026, 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%. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. 2. Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Required 1 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessee to account for the reassessment. Note: 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 transaction list View journal entry worksheet No Date January 01, General Journal Debit Credit 1 2020 Right-of-use asset Lease payable 2 December 31, 2026 Interest expense Amortization expense 3 December 31, 2020 Interest expense Amortization expense Show less A Required 2 Prepare the journal entry, if any, on January 1 and on December 31 of the third year, 2026 for the lessor to account for the reassessment. Note: 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 transaction list View journal entry worksheet No 1 Date January 01, 2028 General Journal Debit Credit Interest expense Lease payable Cash December 31, 2 Amortization expense 2026 Right-of-use asset Show less
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