How is this for an answer for Example 1? Need feedback please.
Since Mango has leased out an asset with Banana for 4 years and classified it as a low value exemption, this will be treated as an operational lease. The rental payments will be expensed out in profit or loss. Though the annual rentals are $2,000 payable in arrears starting from the second year and the first year being a rent-free period, Mango will record $1,500 (£2,000*3/4) as an expense every year due to matching concept.
At the end of the first year, Mango will debit an expense of $1,500 in the SOPL but since they are not paying anything at the end of the first year, they will record an accrual in the SOFP. The entry will be
DR Rental expense $1,500 CR Accrued rental $1,500
At the end of the second year, mango will pay $2,000 to banana as rental. This rental payment will credit the bank. An expense of $1,500 will be debited in the SOPL and accrued rent of $500 will be debited in the SOFP. The accounting entries will be
DR Rental expense $1,500 DR Accrued rent $500 CR Bank $2,000
The above treatment of the second year will be carried out for the third and fourth year as well and at the end of the fourth year the accrued rent will be down to zero.
Hello sir, In the final sections of the idea, I m not able to get a fair idea of the journal entry and their explanation? could you explain it to me, sir? especially, i cant understand what accruals are over here? the expenditure ?
no doubt he is best.. but john Moffat is also another gem. he delivers lecture professionally and respond to all your queries.. my F9 and AFM passed just because of him. And i m hoping to pass SBR with Chris lectures..
At time stamp 12:22, The company elected to apply low value exemption, however as per IFRS 16 can we really elect to do so given the lease term is longer than 12 months?
emadzafar says
How is this for an answer for Example 1? Need feedback please.
Since Mango has leased out an asset with Banana for 4 years and classified it as a low value exemption, this will be treated as an operational lease.
The rental payments will be expensed out in profit or loss. Though the annual rentals are $2,000 payable in arrears starting from the second year and the first year being a rent-free period, Mango will record $1,500 (£2,000*3/4) as an expense every year due to matching concept.
At the end of the first year, Mango will debit an expense of $1,500 in the SOPL but since they are not paying anything at the end of the first year, they will record an accrual in the SOFP. The entry will be
DR Rental expense $1,500
CR Accrued rental $1,500
At the end of the second year, mango will pay $2,000 to banana as rental. This rental payment will credit the bank. An expense of $1,500 will be debited in the SOPL and accrued rent of $500 will be debited in the SOFP. The accounting entries will be
DR Rental expense $1,500
DR Accrued rent $500
CR Bank $2,000
The above treatment of the second year will be carried out for the third and fourth year as well and at the end of the fourth year the accrued rent will be down to zero.
Angoh says
Thank you
ashwathkj00 says
Hello sir,
In the final sections of the idea, I m not able to get a fair idea of the journal entry and their explanation?
could you explain it to me, sir? especially, i cant understand what accruals are over here? the expenditure ?
thank you
danishsait786 says
Easily the best tutor from open tuitions.
misbahkiran says
no doubt he is best.. but john Moffat is also another gem. he delivers lecture professionally and respond to all your queries.. my F9 and AFM passed just because of him. And i m hoping to pass SBR with Chris lectures..
lucie13 says
100% agree with you
jay says
Hi
At time stamp 12:22, The company elected to apply low value exemption, however as per IFRS 16 can we really elect to do so given the lease term is longer than 12 months?
juanalonso says
what is considered a low value lease? is that not a bit subjective as to what different companies may elect as “low value”?
great lecture in any case!