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Leases, low value and short life exemption - ACCA Financial Reporting (FR)

VIVA Subject Guide
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25 Comments

  1. Nikita
    Hi Sir, Since the journal states Bank as well, so why havent we included it in year 1 ,2,3,4 presentation done in last ?
  2. Tugcem Kocadal
    Hi Sir,
    Thank you for your great lectures firstly. I have a question regarding a question on Kaplan workbook. The question is;
    On April 20x6 Taggarts acquires telephones for its sales force under a two-year lease agreement. The terms of the lease require an initial payment on $2000, followed by two payments of $8000 each on 31 March 20x7 and 31 March 20x8.

    My answer is;
    Year1
    DR expense 6750
    CR accruals 4750
    CR bank 2000

    Year2
    DR expense 2250
    DR accruals 5750
    CR bank 8000

    Year3
    DR expense 9000
    CR accruals 1000
    CR bank 8000

    SPL. Year1. Year2 Year3
    Expense. 6750. 2250. 9000


    SFP.
    Accruals. 4750. (1000). NIL

    Is my answer correct? can accruals be negative on year 2?
    Thank you for your help in advance!
  3. Tugcem Kocadal
    My potential other answer is;
    Year1
    DR expense 6750
    CR accruals 4750
    CR bank 2000

    Year2
    DR expense 2250
    DR accruals 4750
    DR prepayment 1000
    CR bank 8000

    Year3
    DR expense 9000
    CR prepayment 1000
    CR bank 8000

    SPL. Year1. Year2. Year3
    Expense. 6750. 2250. 9000

    SFP.
    Accruals. 4750. NIL. NIL
    Prepayment - 1000. NIL

    Please help me out, which one is the correct way to do it?
  4. ZulmaSupporter
    It is only two years
  5. nymnzm
    What if lessor grants 2nd year as rent free period ? And how will it be recorded?
  6. P2-D2Tutor
    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.

    Thanks
  7. Jatin
    Hello Sir,
    What if there is no rent-free period, in that case, will we Dr. the SPL A/c and Cr. the Bank A/c with $2,000 for the 4 yrs and only the Rental expense be shown in the SPL?

    Thanks
    Jatin
  8. divij19
    sir,
    why cant we just pay 2000 in the next three years and show nothing in the first year
  9. MikeLittleTutor
    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
  10. faramental
    hello,

    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
  11. P2-D2Tutor
    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.

    Thanks
  12. Johann
    Hello Sir,

    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?
  13. P2-D2Tutor
    Hi,

    You would just have the cash paid each year being the same as the expense each year.

    Thanks
  14. Nomad
    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

    ?
  15. P2-D2Tutor
    No, this is not an allowed accounting treatment.
  16. Nomad
    Sir
    one which side do we show ACCRUALS? on the asset side or liability in SFP?
  17. P2-D2Tutor
    Liability!
  18. P2-D2Tutor
    Hi,

    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.

    Thanks
  19. Anazuo
    Okay, thank you.
  20. mohsin17222
    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?
  21. P2-D2Tutor
    Hi,

    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.

    Thanks
  22. abiaccastudent
    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 ?
  23. P2-D2Tutor
    Hi,

    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.

    Thanks
  24. Anazuo
    Hello,
    This entry:

    DR Expense 1,500
    DR Accrual 500 (balancing figure)
    CR Bank 2,000

    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?
  25. P2-D2Tutor
    Hi,

    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.

    Thanks

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