On January $1,2024,$ Rick$$s Pawn Shop leased a truck from Corey Motors for a six$-$year period with an option to extend the lease for three years.

Rick$$s had no significant economic incentive as of the beginning of the lease to exercise the three$-$year extension option. Annual lease payments are $$25,000$ due on December $31$ of each year, calculated by the lessor using a $4\%$ discount rate.

The expected useful life of the asset is nine years, and its fair value is $$187,500.$

Assume that at the beginning of the third year, January $1,2026,$ 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 $5\%.$

Note: Use tables, Excel, or a financial calculator. $($FV of $$1,$ PV of $$1,$ FVA of $$1,$ PVA of $$1,$ FVAD of $$1$ and PVAD of $$1)$

Required:

Prepare the journal entry, if any, on January $1$ and on December $31$ of the third year, $2026$ for the lessee to account for the reassessment.

Prepare the journal entry, if any, on January $1$ and on December $31$ of the third year, $2026$ for the lessor to account for the reassessment.