check well, in this example, the PV of the lease payment was computed with a DF for 4 years instead of the 5 years lease term. This is to take care of the initial payment. My understanding is that, once you made advance payment, that deposit is not a liability and remember, the right of use is the lease liability plus any direct cost
S
Shoaib·
If we pay $5000 in advance shouldn't we credit cash instead of adding it into liability?
Can you tell me which method resulting in correct treatment of current and non current lease liability. I know that the method 1 is prescribed by the book but it seems very unreal, especially with long term lease, where the current portion is very small compared to the non current component. While in method 2, the cashflow from the year end onwards is discounted to year end, and the current part is the cash paid in next year discounted to current year end, seems more appropriate?
Thanks.
S
Syed·
Hi, how did you get 3.546 AF?
M
Michael·
Annuity Tables
K
kanyinsolaonafuye·
you can also use this formula (1-(1+r)^-n)/n
K
kanyinsolaonafuye·
sorry (1-(1+r)^-n)/r
K
Kim·
I'm having the same question
Shouldn't we deduct the initial payment of $5,000 from the initial present value of lease payment of $22,730?
N
Nidhi·
Hello,
the value of the right of use asset is stated in the BPP book as the PV of the lease payments not paid at commencement date + payments made before the commencement date+ direct costs. In the above example, do we assume that the minimum lease payments of $22730 includes the first payment of $5000. I'm a little unsure about the treatment of the same to find out the value of the right of use of asset.
Thank you,
Nidhi
N
Nidhi·
I'm sorry I re-read the text.
the corrected question is, the BPP text adds on the initial payment to the right of use asset value and does not subtract the initial cash paid in the lease liability computation. Just wondering if the difference in accounting treatment is correct or not.
Thanks,
Nidhi
J
joseph·
check well, in this example, the PV of the lease payment was computed with a DF for 4 years instead of the 5 years lease term. This is to take care of the initial payment. My understanding is that, once you made advance payment, that deposit is not a liability and remember, the right of use is the lease liability plus any direct cost
A
ajithsk·
Ya,i too havd same confution ..think BPP example is the correct way snd this example presentation form shall ignore..
A
ajithsk·
Further presentation form confusssed becaused here stated gross then deducted but BPP example start with net figure as exactly match the wordinv of 'the lease lisbility is initially measured at the present value ov lease payments not paid at the commencement date'
T
ton1031·
The ? does not say there is an initial/commencement payment of $5,000 plus 5 payments of $5,000 each. Five payments are required and the first payment starts now 1-1-2015. The $22,730 PV given includes the now required $5,000 and the other 4 payments of $5,000 each. As such, the R of U Asset & Lease Liability do agree at the start of the day (1-1-2015) at $22,730 before the first payment of $5,000 is due and paid at the end of the same day (1-1-2015). This, then, lines up with BPP. Hope this helps.
****Cr Accumulated Depreciation
Can u please advise what is the subsequent double entry for lesse?
Dr depreciation
Cr ?
Dr interest
Cr?
Thanks in advance
I believe the double entry in the SPL is:
Dr Depreciation
Cr Right of use asset
Dr Financing Cost (Interest)
Cr Lease Liability
****Cr Accumulated Depreciation
Subsequently we:
Dr, Finance cost (in P/L) and Cr, Lease liability (increasing lease liability)
Dr, Financing cost, Cr, cash (decreasing lease liability)
For example:
Instalment 10000
rate 5%
term 5 yrs
paid in arrea
OB Interest Instalment CB discount at CB
1 43,295 2,165 10,000 35,460
2 35,460 1,773 10,000 27,232 9,524
3 27,232 1,362 10,000 18,594 9,070
4 18,594 930 10,000 9,524 8,638
5 9,524 476 10,000 - 8,227
method 1:
CL 8,227
NCL 27,232
method 2:
CL 9,524
NCL 25,936
Can you tell me which method resulting in correct treatment of current and non current lease liability. I know that the method 1 is prescribed by the book but it seems very unreal, especially with long term lease, where the current portion is very small compared to the non current component. While in method 2, the cashflow from the year end onwards is discounted to year end, and the current part is the cash paid in next year discounted to current year end, seems more appropriate?
Thanks.
Shouldn't we deduct the initial payment of $5,000 from the initial present value of lease payment of $22,730?
the value of the right of use asset is stated in the BPP book as the PV of the lease payments not paid at commencement date + payments made before the commencement date+ direct costs. In the above example, do we assume that the minimum lease payments of $22730 includes the first payment of $5000. I'm a little unsure about the treatment of the same to find out the value of the right of use of asset.
Thank you,
Nidhi
the corrected question is, the BPP text adds on the initial payment to the right of use asset value and does not subtract the initial cash paid in the lease liability computation. Just wondering if the difference in accounting treatment is correct or not.
Thanks,
Nidhi