On January 1, 2018, Rick\'s Pawn Shop leased a truck from Chumley Motors for a s
ID: 2392739 • Letter: O
Question
On January 1, 2018, Rick's Pawn Shop leased a truck from Chumley Motors for a seven-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 $15,000 due on December 31 of each year, calculated by the lessor using a 4% 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, 2018 2. Prepare the journal entries to record interest and amortization at December 31, 2018 Complete this question by entering your answers in the tabs below.Explanation / Answer
1 & 2) Lease payable = Annual Lease payments*PVAF(4%, 7 yrs)
= $15,000*6.00205 = $90,031
Journal entries for the lease transactions are shown as follows:-
Journal Entries (Amounts in $)
Date General Journal Debit Credit January 01, 2018 Right-of-use asset 90,031 Lease payable 90,031 (To record the beginning of the lease) December 31, 2018 Interest Expense ($90,031*4%) 3,601 Lease Payable (Bal fig) ($15,000-$3,601) 11,399 Cash 15,000 (To record the lease and interest payment) December 31, 2018 Amortization Expense ($15,000 - $3,601) 11,399 Right-of-use asset 11,399 (To record the amortization of right of use asset)