Question

High Time Tours leased rock-climbing equipment from Adventures Leasing on January 1, 2018. High Time has the option to renew the lease at the end of two years for an additional three years for $8,000 per quarter. Adventures purchased the equipment at a cost of $198,375.(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.)

Related Information:
Lease term	2 years (8 quarterly periods)
Lease renewal option for an additional	3 years at $8,000 per quarter
Quarterly lease payments	$15,000 at Jan. 1, 2018, and at Mar. 31, June 30, Sept. 30, and Dec. 31 thereafter.
Economic life of asset	5 years
Interest rate charged by the lessor	8%

Record the beginning of the lease for High Time.                                   DR        CR

Record the lease payment for High Time.                                                DR         CR

Record the lease and interest payment for High Time                                   DR         CR

Record the amortization of right-to-use asset for High Time.                       DR         CR

Answer 1

Since there is a renewal option after 2 years of lease, and the renewal rate
of lease is significantly lower than current rate, so there is chances of lease
renewal and lease term will be considered for 5 years.
For first 2 years		15000	x PVAD $1, 2%, 8
		15000	x 7.47199	=	$ 112,079.85
For 3 years		8000 x PVAD $1, 2%,12 x PV $1, 2%, 8
		8000 x 10.78685 x 0.85349		=	$    73,651.75
					$        185,732	rounded
	[i = 2% (8% ÷ 4) because the lease calls for quarterly payments.]
Date	Account titles and explanation			Debit	Credit
Jan 1, 2018	Right-of-use equipment			$185,732
	Lease liability (present value calculated above)				$185,732
	Lease liability			$15,000
	Cash (Lease Payment)				$15,000
Apr 1, 2018	Interest expense (2% x [$185,732 – 15,000])			$        3,415
	Lease liability (difference)			$     11,585
	Cash (lease payment)				$          15,000
	Amortization expense ($185,732 ÷ 20 quarters)			$        9,287
	Right-of-use equipment				$            9,287
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