Question

# On January 1, 2018, Rick’s Pawn Shop leased a truck from Chumley Motors for a five-year...

On January 1, 2018, Rick’s Pawn Shop leased a truck from Chumley Motors for a five-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 \$14,000 due on December 31 of each year, calculated by the lessor using a 5% interest rate. The agreement is considered an operating lease. (FV of \$1, PV of \$1, FVA of \$1, PVA of \$1, FVAD of \$1and PVAD of \$1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Prepare Rick’s journal entry to record for the right-of-use asset and lease liability at January 1, 2018.
2. Prepare the journal entries to record interest and amortization at December 31, 2018.

 1. Present value of lease payments= \$60,613 \$14000 X 4.3295 (Present value of an annuity due at 5% for 5 years) Right to use asset a/c \$60,613 Lease liability a/c \$60,613 (being asset taken on lease) 2. Amortisation schedule Date Annual lease payments Interest @ 5% Reduction Lease liability 01-Jan-18 \$60,613 31-Dec-18 \$14,000 \$3,031 \$10,969 \$49,644 31-Dec-19 \$14,000 \$2,482 \$11,518 \$38,126 31-Dec-20 \$14,000 \$1,906 \$12,094 \$26,032 31-Dec-21 \$14,000 \$1,302 \$12,698 \$13,334 31-Dec-22 \$14,000 \$667 \$13,333 \$0 31-Dec-18 Interest expenses a/c \$3,031 Interest liability \$3,031 (being interest expenses recorded)

#### Earn Coins

Coins can be redeemed for fabulous gifts.