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November 24, 2019 at 9:16 am
What if lessor grants 2nd year as rent free period ? And how will it be recorded?
February 9, 2020 at 10:27 am
In the same way. You look at the total payments and divide by the number of lease periods to work out the annual rental expense and then proceed from there. A rent free period in the second year isn’t really an likely situation anyway.
September 17, 2019 at 3:45 am
sir, why cant we just pay 2000 in the next three years and show nothing in the first year
September 17, 2019 at 11:49 am
Why should year 1 results benefit from the use of that asset yet show no expense? The accepted accounting treatment is to show the true cost of the lease of the asset and charge it over those accounting periods that benefit from the use of that leased asset
August 9, 2019 at 4:55 pm
it is said that payable in arrears which also means pay in next year. so, the first year is rent-free, meaning we dont have to pay anything in yr2. but for yr2 payment, shouldnt it be paid in yr3? therefore we should not credit bank 2000 in yr2?
correct me if im wrong
February 9, 2020 at 10:28 am
No, payment in arrears means payment at the end of the period. Therefore the payment in year two is made on the last day of the reporting period of year two.
June 2, 2019 at 1:15 am
Hello Chris, I was doing one example for low value asset from Kaplan P-185. Solution is also provided there but for one year only. I have tried to do next two year with journal as well. Would you please let me know if my entry is correct if not please let me what would be the correct treatment. Thanks. Mohammad Alam
Example- On 1 April 20X6 Taggart acquires telephones for its sales force under a two-year lease agreement. The terms of the lease require an initial payment of $2,000, followed by two payments of $8,000 each on 31 March 20X7 and 31 March 20X8.
Required- Show the impact of this lease arrangement on the financial statements of Taggart for the year ended 31 December 20X6.
Solution- Annual Lease rental= (Total Rental Payable/ Total Lease Period) =($2,000+$8,000+$8,000) / 2 = $9,000 per Annum
Expense to 31 December 20X6 = $9,000 × 9/12 = $6,750
Double Entry- Year 20X6 Dr Statement of Profit and Loss (Expense Increase) $6,750 Cr Accruals $4,750 Cr Bank $2,000
Year 20X7 Dr Statement of Profit and Loss (Expense Increase) $9,000 Dr Accruals $4,750 Cr Accruals $5,750 Cr Bank $8,000
Year 20X8 Dr Statement of Profit and Loss (Expense Increase) $2,750 Dr Accruals $5,750 Cr Bank $8,000
Financial statements extract: Statement of Profit or Loss for the year ended 31 December Lease rental Expense 20X6 ($6,750) 20X7 ($9,000) 20X8 ($2,250)
Statement of Financial Position as at 31 December Current Liabilities- Accrual 20X6 $4,750 20X7 $5,750 20X8 Nil
March 1, 2019 at 3:02 am
What if there hadn’t been that incentive of rent-free period in the first year and we had to pay for all four years? how would it be recorded then?
May 20, 2019 at 2:42 pm
You would just have the cash paid each year being the same as the expense each year.
February 10, 2019 at 7:41 am
sir instead of crediting accruals how about this
YEAR 1 DR SPL 1500 CR DISCOUNT RECEIVED 1500
YEAR 2 DR SPL 1500 DR DISCOUNT RECEIVED 500 CR BANK 2000
May 20, 2019 at 2:43 pm
No, this is not an allowed accounting treatment.
February 10, 2019 at 7:27 am
Sir one which side do we show ACCRUALS? on the asset side or liability in SFP?
December 26, 2018 at 3:55 pm
in the first example we record the lease rental as Cr. accruals. Why not a provision? What is the difference between a provision and an accrual?
December 26, 2018 at 9:53 pm
A provision is essentially accounting for uncertainty and is a liability of uncertain timing or amount. Here we know the amount and the timing of the payment hence why it is not a provision.
October 19, 2018 at 9:34 pm
Okay, thank you.
August 30, 2018 at 5:49 pm
Hi Sir, when we didn’t pay the 1st year rental then the liability which is recording of $1,500 is the next year payable amount or something else? Secondly, Per annum rental is $1,500 then in the 2nd year why we we record accrual $ 500 ?
Suppose that if any year payment couldn’t pay then what is the treatment of that year payment?
August 30, 2018 at 10:24 pm
The $1,500 recorded in the first year is an accrual and is released over the remaining years of the lease, so three year in this instance.
As you can see in the response to the post below, the accrual is reduced each year by $500.
If we couldn’t pay then we would record a payable for the $2,000 due, but still record the expense and reduction in the accrual.
June 26, 2018 at 11:06 am
hi sir, when we credited accrual in 1st yr after that we cr cash by 2000 if we didnt pay the lessor in first yr for the expense where did the 500 goes ?
August 30, 2018 at 10:21 pm
So in the first year we don’t pay any cash, but in the second year we will pay the $2,000 and process the following entry:
DR Expense 1,500 DR Accrual 500 (balancing figure) CR Bank 2,000
So for each of the following years after the first year we are releasing the accrual.
October 18, 2018 at 1:31 pm
Hello, This entry:
Will it be the same (identical) for year 3 and 4? Also, in the financial statement extract you did for SFP, you didn’t include any accounting for bank/cash. Why?
October 18, 2018 at 8:23 pm
Yes, it will be the same for the final two years (year 3 and 4).
We’ve not included and accounting for cash as we’ve not got any cash balance in the question to be able to adjust.
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