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Dear Mike,
I would appreciate if you could explain the workings of Deferred income from BPP study text, why do we take only 3 years out of 5 in Non-current liabilities?Capital Co entered into a sale and finance lease on 1 April 20X7. It sold a lathe with a carrying amount of $300,00 for $400,00 and leased it back over a five-year period, equivalent to its remaining useful life.The finance lease provided for five annual payments in arrears of $90,000. The rate of interest implicit in the lease is 5%.
Required
What are the amounts to be recognised in the financial statements at 31 March 20X8 in respect of this transaction?Statement of profit or loss
Profit on disposal (100,000 / 5) 20,000
Depreciation (400,000 / 5) (80,000)
Interest (W) (20,000)Statement of financial position
Non-current asset
Property, plant and equipment (400,000 – 80,000) 320,000
Non-current liabilities
Finance lease liability (W) 256,500
Deferred income (100,000 × 3/5) 60,000
Current liabilities
Finance lease liability (330,000 – 256,500) (W) 73,500
Deferred income (100,000 / 5) 20,000The lease was entered into in X7. We are now in X8 so one year has already gone.
At the end of this first year, we still have 4 more to go. But only one of those four will be settled within the next 12 months, so only one year is current. That leaves tree that must be non-current
Is that ok?
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