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 $15,500 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 $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.

• Required 1
• Required 2

Prepare Rick’s journal entry to record for the right-of-use asset and lease liability at January 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Journal entry worksheet

• Record the beginning of the lease for Rick's.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 01, 2018

• Required 2

Prepare the journal entries to record interest and amortization at December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to the nearest whole dollar amount.)

Journal entry worksheet

• Record the lease and interest payment for Rick's.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

• Record the amortization of right-to-use asset for Rick's.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2018

Answer 1

Period	payment	Discount rate@5%	Present value
0		1.00000	$               -
1	$ 15,500	0.95238	$     14,762
2	$ 15,500	0.90703	$     14,059
3	$ 15,500	0.86384	$     13,389
4	$ 15,500	0.82270	$     12,752
5	$ 15,500	0.78353	$     12,145
	Lease liability		$     67,107

Cash Paid	$     15,500
Less: interest paid (67107*5%)	$        3,355
Lease payable paid	$     12,145

Journal entries
Date	General Journal	Debit	Credit
January 01, 2018	Right of use Asset	67,107
	Lease Payable		67,107
	To record for the right-of-use asset and the lease liability.
December 31, 2018	Interest expense	$         3,355
	Lease Payable	$       12,145
	Cash		$          15,500
	To record the lease and interest payment for Rick's.
December 31, 2018	Amortizationn expense	$       12,145
	Right of use Asset		12,145
	To record the amortization of right-to-use asset for Rick's.