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Example 1 – Low-value assets
Banana leases out a machine to Mango under a four year lease and Mango elects to apply the low-value
exemption. The terms of the lease are that the annual lease rentals are $2,000 payable in arrears. As an
incentive, Banana grants Mango a rent-free period in the first year.
Explain how Mango would account for the lease in the financial statements.what would be our journal entries if we leased the machine midway of year 1?
we would still have to pay 2000 for the three following years , so per annum =1500first year
dr sopl 750
cr accrual 750second year
dr sopl 1500
dr accrual 500
cr bank 2000year 3
dr sopl 1500
dr accrual 250
dr ?
cr bank 2000I am confused , please help me here
Hi,
We would pro-rate the expense as you have done in year 1 but then I think you would create a prepayment in the last year. You have effectively paid 2,000 this year but only expensed 1,500 and are left with the 500. You have now effectively paid 500 towards the next accounting period which we then release to profit or loss.
Thanks
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Could you give me the journal entries ?
thank youIf you try them out then I’ll let you know if you’re right or not. It’s better for your learning that way. Good luck!
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Professor I did not understand the earlier response , I thought seeing the journal entries would help .
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Year 3:
Similar to Year 2, you have an accrual of $250 left from the previous year, which reduces the amount to be expensed to $1,750 ($2,000 – $250). The journal entry would be:
Dr SOPL: $1,750
Dr Accrual: $250 (remaining amount from the previous year)
Cr Bank: $2,000
Year 4:In the final year, there is no accrual left from the previous years. However, you have effectively paid $500 more than the total lease expenses ($2,000/year for 4 years = $8,000). This excess payment is considered a prepayment for the last year. The journal entry would be:
Dr Prepayment: $500 (prepayment made in previous years)
Cr SOPL: $500 (to recognize the prepayment as an expense in the last year)I dont understand , could you help me with the entries, thank you for being available
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