On January 1, 2021, Rick’s Pawn Shop leased a truck from Corey
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 $20,000 due on December 31 of each year,
calculated by the lessor using a 7% interest rate. The agreement is
considered an operating lease. (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 Rick’s journal entry to record for the
right-of-use asset and lease liability at January 1, 2021.
2. Prepare the journal entries to record interest
and amortization at December 31, 2021.
On January 1, 2021, Rick’s Pawn Shop leased a truck
from Corey 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 $20,000 due on December
31 of each year, calculated by the lessor using a 7% interest rate.
The agreement is considered an operating lease. (FV of $1, PV of
$1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use
appropriate factor(s) from the tables provided.)
Required:
1. Prepare Rick’s journal entry to record for the
right-of-use asset and lease liability at January 1, 2021.
2. Prepare the journal entries to record interest
and amortization at December 31, 2021.
| 1 | Date | Account Title | Debit ($) | Credit ($) |
| 1-Jan-21 | Right-to-Use Asset | 82,004.00 | ||
| Lease Payable (20,000 * 4.10020) | 82,004.00 | |||
| (To record the inception of lease payable) | ||||
| 2 | Date | Account Title | Debit ($) | Credit ($) |
| 1-Jan-21 | Interest Expenses (82,004 * 7%) | 5,740 | ||
| Lease Payable (20,000 - 5,740) | 14,260 | |||
| Cash (Lease Payment) | 20,000 | |||
| (To record the lease payment ) | ||||
| 31-Dec-21 | Amortization Expenses (20,000 - 5,740) | 14,260 | ||
| Right to use Asset | 14,260 | |||
| (To Record the amortization expenses) | ||||
| Note : Present Value of Annuity, 7% for 5 years = 4.10020 |
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