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Measurement of the lease liability.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Measurement of the lease liability.

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • December 1, 2018 at 9:50 am #486652
    camilopereira02
    Member
    • Topics: 3
    • Replies: 0
    • ☆

    Hi Sir,

    Could you please help me with the following question from BPP.

    Fino CoQ QTQ case.

    On 1 april 20×7, Fino Co increased the operation capacity of its plant. On the recommendation of the finance director, Fino Co. entered into an agreement to lease the plant from manufacture. The present value of the future payments is $350,000. The lease requires three annual payments in advance of $ 100,000 each, commencing on 1 April 20×8. The rate of interest implicit in the lease is 10%. The lease does not transfer ownership of the plant to Fino Co. by the end of the lease term and there is no purchase option available. A non-refundable deposit of $ 100,000 is payable on 1 April 20×7.

    Fino Co incurred initial direct costs of $ 20,000 and received lease incentives from the manufacturer totalling $ 7,000. After four years it will have to dismantle the plant an estimated(discounted) cost of $15,000.

    What is the amount that should be shown under non-current liabilities at 31/03/20×9 in respect of this plant?

    Answer from BPP:

    Right of use asset calculation 478,000
    Less Non Ref. deposit (100,000)
    Lease Liability =378,000
    interest Accrued 1/4/x7-31/03/x8 37,800
    Lease Liability as at 31.3.×8 415,800
    Payment on 1/4/x8 (100,000)
    Interest Accrued 1/4/x8-31/03/x9 31,580
    Lease liability as at 31/03/x9 347,380

    Current Liability as at 31/03/x9 100,000
    Non current liability as at 31/03/x9 247,380

    I have been struggling on this question to understand why they took the right of use asset less Non refundable deposit to arrive to the lease liability of 378,000?

    On my own workings I just took the present value of the future payments of 350,000 as the lease liability.

    Could you please help me this question? Thank you so much.

    December 3, 2018 at 8:27 pm #487048
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    I think it is a bit of a trick question but the 350,000 is the value of the future lease payments, so will not include the initial deposit, and is just the present value of the three lease rentals of 100,000. We therefore need to add this on to get the value of the right-of-use asset and corresponding liability.

    The deposit is then paid immediately at the start of the lease and therefore reduces the outstanding liability value as we DR Liability CR Bank with the deposit payment.

    Thanks

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