Assignment task:
Anthony's Ristorante has served award-winning, traditional Italian dishes, including pasta, steak, veal, ossobuco, saltimbocca, and seafood, using recipes that were handed down by Anthony's grandmother and that are still prepared the way they were nearly 50 years ago. On January 1, 2004, Anthony decided to open a second location and leased restaurant space from Fauci Properties under a 20-year lease agreement. The lease agreement specified annual payments of $50,000 beginning January 1, 2004, the beginning of the lease, and on each December 31 thereafter through 2022. The leased property had been acquired by Fauci at a cost of $625,000 (its fair value) and when it was expected to have a remaining useful life of 30 years. Fauci calculated the lease payments to provide an 8% return on its investment. By this arrangement, the lease was deemed to be an operating lease.
On December 31, 2020, Anthony's was barely able to make its 2020 lease payment (for 2021) as a result of the impact of COVID-19 on Anthony's operations. Anthony's asked for, and received, a deferral of the next two years lease payments (2021 and 2022) until December 31, 2023, with the addition of three years to the lease term. The new payment schedule is:
The market rate of interest at the time was 6%. The present value of the new payments was $202,911 on December 31, 2020, at which time the fair value of the restaurant space was $210,000.
Required:
Assuming that both companies choose the option under the CARES Act to not reclassify the lease from an operating lease:
Prepare the appropriate entries for Anthony's Ristorante on December 31, 2020, to adjust its lease liability for the lease modification.
Prepare all appropriate entries for Fauci Properties on December 31, 2020, to record the lease modification.
Prepare all appropriate entries for Anthony's Ristorante on December 31, 2021, related to the lease.
Prepare all appropriate entries for Fauci Properties on December 31, 2021, related to the lease.