On January 1, 2018, Rick’s Pawn Shop leased a truck from Chumley Motors for a six-year…

On January 1, 2018, Rick’s Pawn Shop leased a truck from Chumley
Motors for a six-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 $14,000 due on December 31 of each year,
calculated by the lessor using a 7% discount rate. The expected
useful life of the asset is 9 years and its fair value is $91,000.
Assume that at the beginning of the third year, January 1, 2020,
Rick’s had made significant improvements to the truck whose cost
could be recovered only if it exercises the extension option,
creating an expectation that extension of the lease was “reasonably
certain.” The relevant interest rate at that time was 8%. (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 the journal entry, if any, at the beginning of the third
year for the lessee to account for the reassessment. 2. Prepare the
journal entry, if any, at the beginning of the third year for the
lessor to account for the reassessment.

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