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Hi,
Regarding the question 24 from the study text (copied below), I do not understand why the depreciation in the P&L is different from the one in the statement of financial position.
I know that in many cases they are different, but in this particular case, I do not get it.Thanks.
Diana
24 Bulwell
Bulwell Aggregates Co entered into a three-year contract to obtain three lorries on 1 January 20X1. The
contract met the IFRS 16 criteria to be classified as a lease and the initial measurement of the right-of-use
asset was $54,000. The agreement states that Bulwell Aggregates will pay a deposit of $9,000 on
1 January 20X1, and two annual instalments of $24,000 on 31 December 20X1, 20X2 and a final
instalment of $20,391 on 31 December 20X3. Ownership will pass to Bulwell at the end of the lease term.
Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on
31 December each year.
The depreciation policy of Bulwell Aggregates Co is to depreciate the right-of-use asset arising from the
lease of the vehicles over a four year period using the straight line method.
Required
Show the entries in the statement of profit or loss and statement of financial position for the years 20X1,
20X2, 20X3. This is the only lease transaction undertaken by this company.
______________________________________________________________________24 Bulwell
STATEMENTS OF PROFIT OR LOSS (EXTRACTS)
20X1 20X2 20X3 20X4
$ $ $ $
Finance cost 11,250 8,063 4,078
Depreciation on lorries 13,500 13,500 13,500 13,500
STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER (EXTRACTS)
20X1 20X2 20X3 20X4
$ $ $ $
Non-current assets
Right-of-use assets 54,000 54,000 54,000 54,000
depreciation 12,500 25,000 37,500 50,000
41,500 29,000 16,500 4,000
Current liabilities
Lease obligations 15,937* 16,313 – –
Non-current liabilities
Lease obligations 16,313 – – –
*(24,000 – 8,063)
Working
$
Lease
Original measurement of right-of-use asset 54,000
Deposit (9,000)
Balance 1.1.20X1 (lease liability) 45,000
Interest 25% 11,250
Payment 31.12.20X1 (24,000)
Balance 31.12.20X1 32,250
Interest 25% 8,063
Payment 31.12.20X2 (24,000)
Balance 31.12.20X2 16,313
Interest 25% 4,078
Payment 31.12.20X3 (20,391)
–You appear to have missed off some small piece of critical information from your post! When I search on the internet for “F7 question Bulwell” the sentence that you have posted … “The depreciation policy of Bulwell Aggregates Co is to depreciate the right-of-use asset arising from the lease of the vehicles over a four year period using the straight line method.” … has a little bit more to it!
Here’s the full sentence including the bit that you omitted what you missed off:
“The depreciation policy of Bulwell Aggregates Co is to depreciate the right-of-use asset arising from the lease of the vehicles over a four year period using the straight line method.
“and assuming a scrap value of $1,333 for each vehicle at the end of its useful life”
So that explains why the company’s depreciation aggregates only $50,000 with a $4,000 residual scrap value
However, I am stuck with the same issue as you – why is the depreciation in the statement of profit or loss $13,500 per annum whereas the depreciation deduction to arrive at the carrying value is only $12,500
I can only assume that BPP has incorrectly omitted to consider the $4,000 residual value when typing the depreciation expense in the statement of financial position
OK?
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