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 $16,000 due on December 31 of each year, calculated by the lessor using a 4% 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 of $1, PVA of $1, FVAD of $1 and PVAD of $1) (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. X Answer is complete but not entirely correct. 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 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.) General Journal Credit No 1 Date January 01, 2023 Right-of-use asset Lease payable Debit 11,585 % 12,645

Answer 1

Year	PV factor @ 4%	Annuity PV factor @ 4%
1	0.96154	0.96154
2	0.92456	1.88609
3	0.88900	2.77509
4	0.85480	3.62990
5	0.82193	4.45182
6	0.79031	5.24214

At the beginning of 2021, the lease extension should not reasonably certain.
Present value of lease receivable (5.24214*16000)					$                                    83,874
Lease amortization table - lessor
Period	Beginning balance of lease receivable	Lease receipt	Interest revenue (Beginning balance of lease receivable* 4%)	Reduction in lease receivable (Lease receipt - Interest revenue)	Ending balance of lease receivable (Beginning balance of lease receivable - Reduction in lease receivable)
December 31, 2021	$                  83,874	$ 16,000	$                        3,355	$                        12,645	$                                    71,229
December 31, 2022	$                  71,229	$ 16,000	$                        2,849	$                        13,151	$                                    58,078

Year	PV factor @ 5%	Annuity PV factor @ 5%
1	0.95238	0.95238
2	0.90703	1.85941
3	0.86384	2.72325
4	0.82270	3.54595
5	0.78353	4.32948
6	0.74622	5.07569
7	0.71068	5.78637

At the beginning of 2023, the lease extension should reasonably certain. Therefore, total number of payment is (4 year remaining [2023 to 2026] and 3 years for lease = extension) = 7
Present value of lease receivable (5.78637*16000)					$                                    92,582
Lease amortization table - lessor
Period	Beginning balance of lease receivable	Lease receipt	Interest revenue (Beginning balance of lease receivable* 5%)	Reduction in lease receivable (Lease receipt - Interest revenue)	Ending balance of lease receivable (Beginning balance of lease receivable - Reduction in lease receivable)
December 31, 2023	$                  92,582	$ 16,000	$                        4,629	$                        11,371	$                                    81,211
December 31, 2024	$                  81,211	$ 16,000	$                        4,061	$                        11,939	$                                    69,272
December 31, 2025	$                  69,272	$ 16,000	$                        3,464	$                        12,536	$                                    56,735
December 31, 2026	$                  56,735	$ 16,000	$                        2,837	$                        13,163	$                                    43,572
December 31, 2027	$                  43,572	$ 16,000	$                        2,179	$                        13,821	$                                    29,751
December 31, 2028	$                  29,751	$ 16,000	$                        1,488	$                        14,512	$                                    15,238
December 31, 2029	$                  15,238	$ 16,000	$                            762	$                        15,238	$                                               0
Balance of lease receivable as of January 1, 2023 after reassessment					$                                    92,582
Less: Balance of lease receivable as of January 1, 2023 before reassessment					$                                    58,078
Effect of reassessment on lease receivable					$                                    34,504

Lessee
No.	Date	General journal		Debit	Credit
1	January 1, 2023	Right-of-use asset		$                        34,504
		Lease payable			$                                    34,504
		To record the reassessment of lease
Lessor
No.	Date	General journal		Debit	Credit
1	January 1, 2023	Lease receivable		$                        34,504
		Truck			$                                    34,504
		To record the reassessment of lease