On January 1, 2024, Gravel Incorporated leased construction equipment from Rocky Mountain Leasing. Rocky Mountain Leasing purchased the equipment from Bishop Incorporated at a cost of $2,031,295. Gravel's borrowing rate for similar transactions is 10% The lease agreement specified four annual payments of $424,000 beginning January 1, 2024, the beginning of the lease, and at each December 31 thereafter through 2026. The useful life of the equipment is estimated to be six years. The present value of those four payments at a discount rate of 10% is $1,478,424 On January 1, 2026 (after two years and three payments). Gravel and Rocky Mountain agreed to extend the lease term by two years. The market rate of interest at that time was 9% Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of S1) Required: 1. Prepare the appropriate journal entries for Gravel Incorporated on January 1, 2026, to adjust its lease liability for the lease modification 2. Prepare all appropriate journal entries for Rocky Mountain Leasing on January 1, 2026, to record the lease modification. 3. Prepare all appropriate journal entries for Gravel Incorporated on December 31, 2026, related to the lease. 4. Prepare all appropriate journal entries for Rocky Mountain Leasing on December 31, 2026, related to the lease.
On January 1, 2024, Gravel Incorporated leased construction equipment from Rocky Mountain Leasing. Rocky Mountain Leasing purchased the equipment from Bishop Incorporated at a cost of $2,031,295. Gravel's borrowing rate for similar transactions is 10% The lease agreement specified four annual payments of $424,000 beginning January 1, 2024, the beginning of the lease, and at each December 31 thereafter through 2026. The useful life of the equipment is estimated to be six years. The present value of those four payments at a discount rate of 10% is $1,478,424 On January 1, 2026 (after two years and three payments). Gravel and Rocky Mountain agreed to extend the lease term by two years. The market rate of interest at that time was 9% Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of S1) Required: 1. Prepare the appropriate journal entries for Gravel Incorporated on January 1, 2026, to adjust its lease liability for the lease modification 2. Prepare all appropriate journal entries for Rocky Mountain Leasing on January 1, 2026, to record the lease modification. 3. Prepare all appropriate journal entries for Gravel Incorporated on December 31, 2026, related to the lease. 4. Prepare all appropriate journal entries for Rocky Mountain Leasing on December 31, 2026, related to the lease.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On January 1, 2024, Gravel Incorporated leased construction equipment from Rocky Mountain Leasing. Rocky Mountain Leasing
purchased the equipment from Bishop Incorporated at a cost of $2,031,295. Gravel's borrowing rate for similar transactions is 10%
The lease agreement specified four annual payments of $424,000 beginning January 1, 2024, the beginning of the lease, and at each
December 31 thereafter through 2026. The useful life of the equipment is estimated to be six years. The present value of those four
payments at a discount rate of 10% is $1,478,424
On January 1, 2026 (after two years and three payments), Gravel and Rocky Mountain agreed to extend the lease term by two years.
The market rate of interest at that time was 9%
Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of S1)
Required:
1. Prepare the appropriate journal entries for Gravel Incorporated on January 1, 2026, to adjust its lease liability for the lease
modification.
2. Prepare all appropriate journal entries for Rocky Mountain Leasing on January 1, 2026, to record the lease modification.
3. Prepare all appropriate journal entries for Gravel Incorporated on December 31, 2026, related to the lease.
4. Prepare all appropriate journal entries for Rocky Mountain Leasing on December 31, 2026, related to the lease.
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