Question

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.

Answer 1

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)