Question

On January 1, 2018, Johns Shop leased a truck from Madix Motors for a six-year period. The useful life of the truck is 9 yrs. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate Assume that at the end of the second year, January 1, 2020, John's and Madix Motors had agreed to extend the lease term by three years. The relevant interest rate at that time was 6%. The truck price was $70,000

Prepare the journal entry, if any, at the end of the second year for the lessee to account for the modification.

Prepare the journal entry, if any, at the end of the second year for the lessor to account for the modification.

Answer 1

Situation -1	Lease Liability	57,864
	Truck (Assets)	57,864
Date	Particular	Amount ($)	Amount ($)
2018
1st Jan	Truck (Assets)                                                 Dr	71,078
	To Lease Liability		71,078
	To record the lease liability at present value of ordinary annuity for $10,000 per year @ 5% for 9 years.
31st Dec	Lease Expenses                                              Dr	10,000
	To lease liability		3,554
	To Truck (Assets)		6,446
	To record lease expense for the Year 2018
31 st Dec	Lease Liability                                                 Dr	10,000
	To Cash		10,000
	To record payment of lease liability
2019	Lease Expenses                                              Dr	10,000
31st Dec	To lease liability		3,232
	To Truck (Assets)		6,768
	To record lease expense for the Year 2019
31 st Dec	Lease Liability                                                 Dr	10,000
	To Cash		10,000
	To record payment of lease liability
Situation - 2	Lease Liability (As per latest terms)	73,600
	Truck (Assets) (As per latest terms)	73,600
Date	Particular	Amount ($)	Amount ($)
2018
1st Jan	Truck (Assets)                                                 Dr	83,838
	To Lease Liability		83,838
	To record the lease liability at present value of ordinary annuity for $10,000 per year @ 6% for 12 years.
31st Dec	Lease Expenses                                              Dr	10,000
	To lease liability		5,030
	To Truck (Assets)		4,970
	To record lease expense for the Year 2018
31 st Dec	Lease Liability                                                 Dr	10,000
	To Cash		10,000
	To record payment of lease liability
2019	Lease Expenses                                              Dr	10,000
31st Dec	To lease liability		4,732
	To Truck (Assets)		5,268
	To record lease expense for the Year 2019
31 st Dec	Lease Liability                                                 Dr	10,000
	To Cash		10,000
	To record payment of lease liability
Date	Particular	Amount ($)	Amount ($)
2020
1st Jan	Truck (Assets)                                                 Dr	15,736
	To Lease Liability		15,736
	To adjust the Assets and lease liability as per latest terms of agreement. (Situation 2 - 1)
31st Dec	Lease Expenses                                              Dr	10,000
	To lease liability		5,360
	To Truck (Assets)		4,640
	To record lease expense for the Year 2020
31st Dec	Lease Liability                                                 Dr	10,000
	To Cash		10,000
	To record payment of lease liability