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For the following question below i got $800 000. But the answer key states that the answer is $160 000. Why?
Qn) The everton compnay leased a freehold building for 20 years, the useful life of the building, with effect from 1 january 20X7. At that date the fair value of the leasehold interest was $7.5million of which $6million was attributable to the building. Annual rentals of $800 000 are payable in advance on 1 january.
How much should everton recognise as an operating lease expense in the year ended 31 december 20X7,according to IAS 17 leases?
The annual rental is $800
The land is worth $1.5
The building is worth $6So 1/5 of the rental relates to the land
The question asks how much should Everton recognise as an OPERATING LEASE expense
Can you take it from there?
I took
Leasehold interest element of building rental
= 4/5 × 800 000
= 640 000Operating lease rental
= 800 000 – 640 000
= 160 000Am i correct? I just want to clarify why we can’t include the land element into our calculation ? Is it because land has no definite useful life ?
As far I see, Building is Freehold and land is Leasehold, so we are stripping land element out, so 800,000 x 1/5 = 160,000.
But that’s for first year, What if the question had asked operating expense for the second year?
For each instalment of $800,000, $160,000 is operating lease rental
“Is it because land has no definite useful life ”
That’s (partly) the reason
For a lease to qualify as a finance lease, not only should the present value of the minimum lease payments by not less than 90% of the asset fair value but the lease term should also be for not less than the asset’s useful life
If Kim Jong-Un carries on as he has recently, then who can tell with certainty when our World will disappear (or if Monsanto is allowed by license to produce the poisons that is slaughtering bees)
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