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A company purchased an a asset on 1.1.x1 for $100,000, with a life of 5 years. On 1.1.x3 they sell the asset to a lessor company for the fair value of $70,000 and lease it back for 2 years with annual lease payment of $20,000 and guranteed residual value of $15,000. The lease has a rate of return of 10%. The amount to be recognised as right of use asset is?
May I know how to calculate the right of use asset for this question?
Dr. Cash (Sale amount) 70,000
Dr. Right of Use asset (Carrying value * % of right retained) 17,144
Dr. Loss (Initial loss * % of right transferred) 7,857
Cr. Non-Current Asset (Note 1) 80,000
Cr. Lease Liability (PV of future payments – value provided in question) 15,000Note 1: Calculating the carrying value of the asset
Value on 1/1/XXX1 100,000
Less: Depreciation (Value of the asset on 1.1.XXX3/ Useful life of the asset) = 20,000
Carrying value of the asset = 80,000
Initial Loss = 10,000Note 2: Calculation of percentage of right retained & right transferred
Present Value (already provided in question) = 15,000
Sale Price = 70,000
Percentage of Right Retained (PV/Sale Price*100) = 21.43
Percentage of Right Transferred (100 – % of right retained) = 78.57Not true.
Let me help you.
A sale recognises cash of $70,000 and derecogises carrying amount of $60,000 (100,000 – 2 yrs depreciation: 1000,000 / 5 x 2)
Then, a lease recognises lease liability as PV of future lease payments:
20,000/1.1 + (20,000+15,000)/1.1² = 47,107For ROUA, take a proportion of rights retained as
Carrying amount of asset x
[Lease liability / Sale at FV]
= 60,000 × [47,107 / 70,000]
= 40,378DR Cash. 70,000
DR Right-of-use asset (ROUA) 40,378
CR Carrying amount of asset. 60,000
CR Lease liability 47,107
CR Gain (SOPL)(Bal. figure) 3,271
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