just a simple question , what would be the journal entry when the initial cash payment of 5000 is made? will it be Dr. Lease liability ?? Cr, cash 5000

We have a present value of all future payments as liability, not just an advance payment. Also as an asset we have PV of future cashflows+costs-incentives, not an advance payment

Well, this isn’t prepayment that meets the criteria for an asset recognition. Lease liability payments are obligations. The advance payment or the payment at the end of the yr(arrears), is just a payment structure agreed in the lease agreement between the lessee and lessor, meaning the payment which is due at the beginning of the year(advance payment) in the question in this video, indicates that an obligation which gives rise to liability is present.

I think the teacher got wrong here. 5000 total is not the lease liability payment. It consists of principal amount of 4113 and interest portion of 887 totaling 5000. Hence, the current liability out of 18617 in year 1 should be 4319 and non current liability should be 18617-4319= 14297. Please correct me if i am wrong here

I’d like to comment on the point sir had made in regards to classifying the lease liability as current and non-current liability.

This is NOT a requirement by IFRS 16, but it should only be considered best practice. ie, if in the exam you don’t distinguish between them, the examiner will not be able to cut marks. So save TIME and just leave it as is.

Also make it a point to work through questions that have the lease payments being made in arrears instead of in advance (like in this question) as this tends to complicate things a little.

Sir there is a question in bpp no 103. Where present value is 1871100 and advance payment of 700000 is effected. Here in the answer they took 6% interest on 1871100. As per this example should not it be 6 % of 1171100(1871100-700000)?

The first payment made is at the very start of the lease, so there is no discounting required. There are then four further payments that will then need discounting over each of the next four years. This has been done in the illustration above.

Why is the recognition working for Right of use asset is DR asset 22730 CR liabiltiy 22730 ? As per the notes shouldn’t it be DR asset 23230 CR liabiltiy 23230 ? as the initial value includes the cost of 500 incurred for acquiring the lease ?

I’m also a student, 22730 is the present value of the asset, DR asset [pv] CR liability [pv], but when u calculate the depreciation u have to use the number of the lease, not the present value, so the initial number is = pv of asset 22730 – direct cost 1000 + reimbursement 500 = 23230, depreciate the asset with this number = 23230/5years = 4646.

u can see at the Right of use asset column, “Cost less accumulated depreciation”. Below that, Note: Depreciation…….. is just telling u how to calculate the depreciation. Therefore, Dr asset 22730. 22730 = Cost less accumulated depreciation, the present value.

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sudipshrestha says

just a simple question ,

what would be the journal entry when the initial cash payment of 5000 is made?

will it be

Dr. Lease liability ??

Cr, cash 5000

Madea says

Please i know advance payment is an asset so why has it been treated as a liability here

mariakurina says

We have a present value of all future payments as liability, not just an advance payment. Also as an asset we have PV of future cashflows+costs-incentives, not an advance payment

megaziz says

Well, this isn’t prepayment that meets the criteria for an asset recognition. Lease liability payments are obligations. The advance payment or the payment at the end of the yr(arrears), is just a payment structure agreed in the lease agreement between the lessee and lessor, meaning the payment which is due at the beginning of the year(advance payment) in the question in this video, indicates that an obligation which gives rise to liability is present.

Madea says

Please i know adavance payment is an assest, so why is it treated as a liability here

sudipshrestha says

I think the teacher got wrong here. 5000 total is not the lease liability payment. It consists of principal amount of 4113 and interest portion of 887 totaling 5000. Hence, the current liability out of 18617 in year 1 should be 4319 and non current liability should be 18617-4319= 14297.

Please correct me if i am wrong here

faeqquadri says

I’d like to comment on the point sir had made in regards to classifying the lease liability as current and non-current liability.

This is NOT a requirement by IFRS 16, but it should only be considered best practice. ie, if in the exam you don’t distinguish between them, the examiner will not be able to cut marks. So save TIME and just leave it as is.

faeqquadri says

Also make it a point to work through questions that have the lease payments being made in arrears instead of in advance (like in this question) as this tends to complicate things a little.

avishco says

Sir there is a question in bpp no 103. Where present value is 1871100 and advance payment of 700000 is effected. Here in the answer they took 6% interest on 1871100. As per this example should not it be 6 % of 1171100(1871100-700000)?

atrojak says

Hi Chris,

I actually recalculated the PV of the lease liability as per example (5000 with n=5 years and i=5% interest) but did not come to 22,730 but 21,647,39.

My calculation:

5000 x 1/1.05 = 4761.90

5000 x 1/1.05^2 = 4535.15

5000 x 1/1.05^3 = 4319.19

5000 x 1/1.05^4 = 4113.51

5000 x 1/1.05^5 = 3917.64

Where did I go wrong please?

Anja

mrjones says

Hi, this may be a bit late, but the present value of the lease liability is calculated as follows;

5000 x 1 = 5000

5000 x 1/1.05 = 4761.90

5000 x 1/1.05^2 = 4535.15

5000 x 1/1.05^3 = 4319.19

5000 x 1/1.05^4 = 4113.51

total 22,730.

The reason for this is the payments are made in advance ie at the start of the year.

Therefore the present value of the 5,000 paid in the first year is 5,000 – essentially all 5 payments are made within 48 months.

I hope this is clear.

oek1 says

Mrjones could you explain this bit further?

P2-D2 says

The first payment made is at the very start of the lease, so there is no discounting required. There are then four further payments that will then need discounting over each of the next four years. This has been done in the illustration above.

yusuf4fl says

Hi,

Why is the recognition working for Right of use asset is DR asset 22730 CR liabiltiy

22730 ?

As per the notes shouldn’t it be DR asset 23230 CR liabiltiy 23230 ? as the initial value includes the cost of 500 incurred for acquiring the lease ?

allenchanyc says

I’m also a student, 22730 is the present value of the asset, DR asset [pv] CR liability [pv], but when u calculate the depreciation u have to use the number of the lease, not the present value, so the initial number is = pv of asset 22730 – direct cost 1000 + reimbursement 500 = 23230, depreciate the asset with this number = 23230/5years = 4646.

allenchanyc says

oops sorry, should be *22730 + 1000 – 500 = 23230.

allenchanyc says

u can see at the Right of use asset column, “Cost less accumulated depreciation”. Below that, Note: Depreciation…….. is just telling u how to calculate the depreciation. Therefore, Dr asset 22730. 22730 = Cost less accumulated depreciation, the present value.