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Hello Tutor,
Could you kindly tell me a point I am missing here. The discount rate used here is of 7th year whereas the lease term is for 8 year?
On 1 April 20X6, Diamond acquired a manufacturing unit under an eight-year lease
agreement. The lease asset and obligation have been accounted for correctly in the financial
statements of Diamond. However, Diamond could not operate from the unit until it had made
structural alterations at a cost of $6.6 million. The manufacturing unit was ready for use on
31 March 20X7. The alteration costs of $6.6 million were charged to administration
expenses. The lease agreement requires Diamond to restore the unit to its original condition at
the end of the lease term. Diamond estimates that this will cost a further $5 million. Market
interest rates are currently 6%.Note. The following discount factors may be relevant:
Years 6%
7 0.665
8 0.627Not sure what number you are trying to calculate. If , for example, payments are in advance, the lease liability would be MLP using 7 years.
Please can you be more specific, but don’t copy and paste the whole question. 🙂
The year end is 31 March 20X7. The lease term commenced on 1 april 20X6 for 8 years.
Two discount rates are given. One for 7th year and the other one for 8th year.
Why didn’t we use the 8th year discount rate whereas we were asked to report at 31 March 20X7 year end?
I still don’t know what number you are trying to calculate. Is it the lease asset or the liability?
I am guessing that you are trying to calculate the PROVISION FOR RSTORATION COSTS.
At the lease inception date this would have been discounted for 8 years.
One year later at the SFP date the discount would have unwound for 1 year.
So the provision would be discounted for 7 years.
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