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 $17,000 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 $127,500. • 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.
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 $17,000 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 $127,500. • 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![Problem 15-7 (Algo) Reassessment of lease term [LO15-2, 15-4, 15-6]
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 $17,000 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 $127,500.
●
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8855e829-be87-471c-bee6-0e1bc499d5ab%2F561cb317-9266-45ed-9989-317283131c57%2Fl1fvuns_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 15-7 (Algo) Reassessment of lease term [LO15-2, 15-4, 15-6]
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 $17,000 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 $127,500.
●
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.
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