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Hello,
i took the new ACCA practice exam and i’m confused regarding this question:
On 1 October 20X4 Flash Co acquired an item of plant under a five-year lease agreement. Under the terms of the agreement, an immediate deposit of $2m is payable on inception of the lease and the present value of future lease payments at that date have been calculated as $25,272,000. Annual rentals of $6m are payable on 30 September each year for five years. The agreement had an implicit interest rate of 5% per annum.
Calculate the current liability for the leased plant in Flash Co’s statement of financial position as at 30 September 20X5.
the answer according to the ACCA practice test website:
Current liability at 30 Sept X5: $20,535,600 – $15,562,380 = $4,973,220
30 Sept X5: $25,272,000 + Int 1,263,600 – Pymt 6,000,000 = $20,535,600
30 Sept X6: $20,535,600 + Int 1,026,780 – Pymt 6,000,000 = $15,562,380
why wasn’t the $2m immediate deposit removed from $25,272,000?
Hi,
It is a tricky one this and it has caught a few people out and it comes down to the narrative within the question.
The $25,272,000 is the present value of future lease payments and emphasis has to be on the word future, as this means that it does not include the $2 million initial payment which is a payment at the start and not in the future. Technically what therefore happens is the $2 million is then added to the $25,272,000 and then immediately deducted at the start of the lease, so we do not need to deduct it from the $25,272,000 figure given.
Thanks
Hi,
It has been explained in the answer given above and there is also an illustration in the class notes. The key is in the narrative where is says that it is the FUTURE cash flows that are at present value, and a deposit being paid is NOT a future cash flow, hence no adjustment required.
Thanks
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