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On 1 January 20X3 Rabbit acquires a new machine with an estimated useful life of 6 years
under the following agreement:
An initial payment of $13,760 will be payable immediately
5 further annual payments of $20,000 will be due, commencing 1 January 20X3
The interest rate implicit in the lease is 8%
The present value of the lease payments, excluding the initial payment, is $86,240
What will be recorded in Rabbit’s financial statements at 31 December 20X4 in respect of
the lease liability?In exam kit they were not deducting the initial payment of $13760 from the lease obligation. Please answer the whole question and specially elaborate my concern about the initial payment.
Thanks.
Hi,
The lease liability is going to be the $86,240, as they will already have deducted the initial payment of $13,760.
When they initially enter the lease they will have DR ROUA CR Lease Liability with the $100,000 (86,240 + 13,760) as the present value of the total lease payments. They will then have made the first payment by DR Lease Liability CR Bank with the $13,760, which leaves the lease liability at $86,240. This is the figure that they tell you in the question as being the lease liability excluding the initial payment.
Essentially they are just jumping the first two steps of recognising the ROUA and recording the initial payment, and starting with the $86,240.
Thanks
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