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Dear sir,
Sorry this may be a stupid question but I really couldnt figure out why. In the following question, the initial capital balance seems to be 25 mln, instead of (25-initial deposit 2 = 23). Can you look into this thank you very much ? (as I thought the capital balance on both the asset and liability side should both = cash price – initial deposit. )
“On 1 April 20×1, Fresco acquired an item of plant under a finance lease agreement that had an implicit finance cost of 10% per annum. The lease payments in the trial balance represent an initial deposit of $2million paid on 1 April 20×1 and the first annual rental of $6min paid on 31 Mar 20×2. The lease agreement requires further annual payments of $6mln on 31 Mar each year for the next four years. Had the plant not been leased it would have cost $25 million to purchase for cash.
The provided answer has the balance on 1 April 20×1 for the lease asset at 25,000, and also the depreciation expenses is 25/5 = 5k.
The trial balance for the relevant entries are:
PP&E – at cost debit balance of 48000
Accumulated depreciation of PP&E at 1 April 20×1 credit balance of 33500
Lease payments debit balance of 8000regards
LmHi Lm
The asset cost and the lease liability ARE the same as at the date of signing the lease – they are both $25M
So Dr TNCA $25m, Cr Obligations account $25
Now pay the $2m deposit
Dr Obligations account $2m, Cr Cash $2m
Now account for the first year’s interest
Dr Finance charges $2.3m, Cr Obligations account $2.3m
And now pay the first instalment
Dr Obligations account $6m, Cr Cash $6m
At no time, other than on initial acquisition have we touched the asset account so your idea that the asset account should equal the obligation account is incorrect
Now calculate depreciation on the $25m asset = $5m depreciation charge for the year
OK?
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