Question

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.
  

Answer 1

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