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Sir when finance lease contract is first made say of $100000 at 10%interest for three years
it is initially recognised as sCr lease liablity – 100000
Dr lease asset – 100000but suppose after a year it becomes on onerous with net cost of $10000/year or penalty cost of $20000
therefore lower of two is to be recognised as a provision
net cost for three year – 30000
penalty cost – 20000
so provision will be made as followsDr lease onerous expense – 20000
lease onerous liability -20000sir what is want to know is that when the entity has paid the penalty of 20000 would that end the lease contract initially recognised at 100000
what would be the double entry in this regard
i understand how provision would be recognised but want to know what would happen to the initial contract ( liability of 100000) when lease becomes onerous.Thanks sir
The liability / provision that arises when the contract becomes onerous is the least amount that would be payable
If, in a 3 year lease contract, at the end of the first year there will only be 2 more years to pay and that’s $20,000, not $30,000 that you have written
The answer that you are looking for is totally dependent upon the precise terms of the contract but it’s highly unlikely that a contract for $100,000 will have a penalty clause for only $20,000
Now, whatever figure we eventually settle on, you are asking about the elimination of the main obligation
Try this:
Dr Obligation account
Cr TNCAwith appropriate adjustments to accumulated depreciation account
OK?
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