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For the following question, can you explain why is there a prepayment and why the deposit divided by 4 years followed by being multiplied by 3 yrs ?
Qn) A company is leasing an asset under a 4 year operating lease.The initial non-refundable deposit is $ 1000 on 1 january of year 1 followed by 4 annual payments in arrears of $1000 each on 31 december of years 1,2,3 and 4.
What is the charge to the statement of profit or loss and any amount to appear in the statement of financial position at the end of year 1 of the lease?
Ans:
SOPL:
Operating lease rental $1250SOFP:
Current assets:
Prepayments ($1000 deposit/4yrs x 3 yrs) $750I presume this is a BPP or a Kaplan question.
The deposit is not part of the annual payments scheme. The lease agreement is for 4 years at the rate of $1,000 per annum with a “premium” of $1,000 paid in advance.
That “premium” should be allocated over the 4 years with 1/4 ($250) being attributable to each of those 4 years.
Thus, for year 1, the charge to statement of profit or loss is the annual payment of $1,000 + 1/4 of the allocated “premium”
(And the same for years 2, 3 and 4)
Is that ok?
how about this question? It’s supposed to be a finance lease infact right?
Qn) On 1st january 20X4 Badger Co entered into a lease agreement to lease an item of machinery for 4 years with rentals of $210000 payable anually in arrears.The asset has a useful life of 5 years and at the end of the lease term legal ownership will pass to Badger co. The fair value of the asset at the inception of the lease was $ 635000 and the interest rate implicit in the lease is 12.2%. For the year ended 31st december 20X4 Badger Co has accounted for this lease as an operating lease and recorded the payment of $210000 as an operating expense. This treatment was discovered during 20X5
In accordance with IAS17 what will the adjustment to retained earnings b/fwd be?
a) $5530 credit
b) $132530 credit
c) $210000 debit
d) NILThe answer given is a). Can you explain the workings ?
At the rate of 12.2% the finance lease interest for the year to 31 December, 2014 is $77,470
Depreciation for the year to 31 December, 2014 is 1/5 x $635,000 = $127,000
The total expense for 2014 is therefore $127,000 + $77,470 = $204,470
The amount wrongly expensed in the 2014 financial statements was $210,000
Therefore the adjustment necessary is a credit of $210,000 – $204,470 = $5,530
OK?
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Should’t we depreciate the asset over the SHORTER of the lease term or the useful economic life?
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Oh sorry, ignore me as the ownership of the asset will be transferred at the end of the lease, so number of economic useful life must be used
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