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Sir i have a doubt in example 2 of Chaper 16 ( leases) of course note. As already mentioned in the course note on first page that finance lease is recorded with the lower of fair value and present value of the minimum lease payments. Why is the Fair value (16000) taken in example 2 ( giedrius) when we havent checked what will be present value of minimum lease payment . sir can you please tell how to calculate present value of minimum lease payment at the time to recognising it as an asset. Usually fair value will be same as minimum lease payment in which case we can take fair value but it doest say so in the question so why have we taken fair value to record assets value in balance sheet?
You can calculate minimum lease payment by listing the payments involved and then discounting them at the appropriate rate
However, in the course notes, the illustrations of both Giedrius and Giedruala are there to test you understanding of the calculations for the finance lease interest and for the figures that will appear in the financial statements.
The examples are not there for you to check whether of not the entities are correct in their allocation of these agreements as finance leases
Having said that, Giedrius is paying $22,652 over the 7 year period so there’s no question that it could be an operating lease!
thank you sir for your reply. sir what if Fair value ( say £2000) is less than the minimum lease payment (£2500).We cannot record liability with fair value as we have obligation to pay the lessor the amount in the lease contract. Therefore will the double entry be as follows ?
Dr finance lease asset – 2000
Dr st of profit and loss – 500
Cr finance liability – 2500If it is true sir then just wanted to know that is £500 taken to to profit and loss in the first year or divided by the lease term (say 5 years) and just £100 is taken to P&L account and rest in later years
I know i am sounding bit silly but sir this is going on in my head since last few days.
Sir please help.
The expression “substantially the whole …” covers this situation
You have to ask yourself “Why would an entity put itself into a contract where the present value of the minimum lease payments exceeded the fair value of the asset … and by so much?”
I believe that the notes and the lectures state that the obligation should be recognised as the lower of the fair value of the asset compared with the present value of the minimum lease payments
So our initial entry in the scenario that you have established would be:
Dr Finance Leased Asset $2,000
Cr Finance Lease Obligation $2,000OK?
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