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this part of construction question in kaplan revision kit No391 ,
iii) The right?of?use plant was acquired on 1 April 20X4 under a five?year lease with an
initial deposit of $2.3 million and annual payments of $1.5 million on 31 March each
year. The present value of the annual payments under the lease (excluding the
initial deposit) at 1 April 20X4 was $5.7 million, the lease has an implicit rate of
interest of 10%, and the right?of?use plant has been correctly capitalised. The lease
liability in the trial balance above represents the initial liability less the first annual
payment-Prepare extracts from the statement of cash flows for Clarion for the year ended
31 March 20X5 in respect of cash flows from investing and financing activities.Cash flows from financing activities
Redemption of loan notes (W5) (5,000)
Repayment of lease liability (2,300 + (1,500 – 570)) (W5) (3,230)– the answer relating to lease which i couldn’t understand why the deduct the finance cost from the lease payment ? and why they include the deposit in lease liability ? shouldn’t be included in investment activity ? kindly Explain ?
The annual lease payment will pay off the interest and the capital element of the outstanding lease liability. The outflow in financing activities is only going to be the capital element of the repayment, the payment of interest will go in operating activities. To get the capital amount paid, we will therefore deduct the finance cost from the annual payment.
The deposit is included as a payment as it is paid at the start of the lease and hence is an outflow in the accounting period.
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