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Finance lease is recognized at least between FV of leased asset and present value of minimum lease payments.
For example, lessee pays during 4 years $1000 per year, 5 % rate. Present value is PV(5%,4years,1000) = $3,546. FV of machine is $3000, so
DR- machinery – $3,546
CR – lease liability – $3,546
DR- FV adjustment – $ 546
CR – machinery – $ 546
Is it right?And what about lessor’s accounting? Let’s say net book value of the given machine was $2000 when transferring. Lessor recognizes receivable at
DR-Receivable – $3546
CR- Machine- $2000
CR- Income- (3546-2000) $1546Is it correct ?
Thank you
First, let’s get rid of the lessor’s problems! Lessor accounting is not in the F7 syllabus
If you really want to know about how the lessor will treat such a strange transaction, ask Chris on the P2 Ask ACCA Tutor forum
Now to the entries for this machine lease.
Here’s the opening line of your post:
“Finance lease is recognized at least between FV of leased asset and present value of minimum lease payments.”
and then you give me figures that don’t make sense! Why would you sign a lease where the present value of the minimum lease payments was $3,546 but the machine itself had a fair value of only $3,000?
In addition, I’m not clear which account is being debited with this entry of yours:
DR- FV adjustment – $ 546
CR – machinery – $ 546I suppose that you could call it something like “Deferred Finance Costs Account” but I’m genuinely not happy with the scenario that you have set up
Why not just ask the lessor for a loan of $546 and treat the annual payments as part payment of both the obligation under the finance lease (for $3,000) and the loan (for the remaining $546)
Fortunately you can rest assured that the F7 examiner will not set such an unlikely scenario within the F7 exam (nor, as a matter of interest, is it likely to appear like that in the P2 exam)
OK?
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