On January 1, 2018, Rick’s Pawn Shop leased a truck from ChumleyMotors for a six-year period with an option to extend the lease forthree years. Rick’s had no significant economic incentive as of thebeginning of the lease to exercise the 3-year extension option.Annual lease payments are $27,000 due on December 31 of each year,calculated by the lessor using a 4% discount rate. Assume that atthe beginning of the third year, January 1, 2020, Rick’s had madesignificant improvements to the truck whose cost could be recoveredonly if it exercises the extension option, creating an expectationthat extension of the lease was “reasonably certain.†The relevantinterest rate at that time was 5%. (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 toaccount for the reassessment.
