Question

On January 1, 2021, Rick’s Pawn Shop leased a truck from Corey 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, 2021. 2. Prepare the journal entries to record interest and amortization at December 31, 2021.

Answer 1

Given, Annual operating lease payment - $ 15,000 for 7 years and rate = 4%

Present value of lease liability =

Where C = annual lease payment. i = rate and n = number of periods

=> Present value of lease liability = 15000 * (1- (1.04)^-7) / 0.04

= $ 90,030.82

Amortization table:-

Year	Opening	Lease amount	Interest	Amortization	Closing
1	90,031	15,000	3,601	11,399	78,632
2	78,632	15,000	3,145	11,855	66,777
3	66,777	15,000	2,671	12,329	54,448
4	54,448	15,000	2,178	12,822	41,626
5	41,626	15,000	1,665	13,335	28,291
6	28,291	15,000	1,132	13,868	14,423
7	14,423	15,000	577	14,423	0

Journal-

Date	Particulars	Debit	Credit
Jan 01 2021	Right of use asset	90,031
	Lease payable		90,031
Dec 31 2021	Interest	3,601
	Lease payable		3,601
Dec 31 2021	Lease expenses	11,399
	Right of use asset		11,399