- October 31, 2021 at 4:38 am #639518
my question is with the initial deposit in the lease. it is treated differently in different sums. Please tell me the logic behind it. here are the three sums –
1)On 1 April 20X1, Fresco Co acquired an item of plant under a lease agreement. The rate of
interest implicit in the lease agreement is 10% per annum. The lease payments in the trial
balance represent an initial deposit of $2 million paid on 1 April 20X1 and the first annual
rental of $6 million paid on 31 March 20X2. The lease agreement requires further annual
payments of $6 million on 31 March each year for the next four years. The present value of
the future lease payments on inception of the lease is $23 million. The useful life of the plant
is 6 years. (in this question they have deducted the deposit while calculating lease liability)
answer – Present value of future lease payments 23,000
Interest 10% 2,300
Instalment 31.3.X2 (6,000)
Balance 31.3.X2 19,300
Interest 10% 1,930
Instalment 31.3.X3 (6,000)
Balance 31.3.X3 15,230
2)On 1 October 20X3, Fresco Co acquired an item of plant under a five-year lease
agreement. The lease required an immediate deposit of $2 million with five payments of
$6 million paid annually in arrears commencing on 30 September 20X4. The present value
of the future lease payments was $22,746,000. The agreement had an implicit finance cost
of 10% per annum.
What will be the current liability in Fresco Co’s statement of financial position as at
30 September 20X4? (here they have not deducted the deposit)
answer – Present value of the future lease payments at 1 October 20X3 22,746,000
Interest at 10% 2,274,600
Less payment in arrears (6,000,000)
Lease liability as at 30 Sept 20X4 19,020,600
Extend the calculation to work out the lease liability at the end
of the next period:
Interest at 10% 1,902,060
Payment in arrears (6,000,000)
Lease liability at 30 Sept 20X5 14,922,660
Calculation of current liability (19,020,600 – 14,922,660) 4,097,940
$1,902,060 is only the interest charge for the next period, $6,000,000 is just the
cash payment to be made, not the liability and $2,274,600 is the interest charge for
the first period only.
3) this questions is on non refundable deposit. how different do we treat them from normal deposit ? also here we have not deducted the deposit fthe present value. I am so confused. please help me out. thank you.
question – Pennyroyal Co acquired an item of plant under a lease on 1 April 20X5. A non-refundable
deposit of $2,000,000 is paid on 1 April 20X5 and the present value of the future lease
payments at that date is $7,092,000. Pennyroyal Co will make four further annual
payments of $2 million paid in arrears commencing 31 March 20X6. The useful life of the
plant is deemed to be eight years. Pennyroyal Co will obtain legal title of the asset
following the final payment.
The interest rate implicit in the lease is 5% per annum.
What is the total charge to appear in the statement of profit or loss in respect of this
lease for the year ended 31 March 20X6?
answer – Present value of future lease payments at 1 April 20X5 7,092,000
Interest (7,092,000 ? 5%) 354,600 354,600
Depreciation is charged over useful life (eight years) as Pennyroyal obtains legal title
of the asset at the end of the lease term.
Right of use asset (PV of future lease payments + initial instalment) 9,092,000
Depreciation charge 9,092,000/8 1,136,500
Charge to the profit and loss is $354,600 (interest expense) + $1,136,500 = $1,491,100
Option A only includes the depreciation charge (ignores the interest expense), B has
depreciation charged over four years (instead of over the useful life of eight years).
Option C is the depreciation charged on the PV of future cash flows figures rather
than the cost of the asset including the initial deposit and including the interest
could you please answer to all these three questions ? and whats the logic with the deposit. thank you.October 31, 2021 at 1:22 pm #639561
sorrysorry even in the first question we havent invkuded deposit. so basically deposit is to be added to right of use asset ?October 31, 2021 at 5:41 pm #639597
4) sorry for multiple question. as per pennyroyal, we dont include non refundable deposit anywhere ?
ROU is calculated as pv of future payment plus initial payment.
so do we ignore non refundable deposits in ROU and put it under current liabilityNovember 7, 2021 at 9:18 am #640135P2-D2Keymaster
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losercase wrote:sorrysorry even in the first question we havent invkuded deposit. so basically deposit is to be added to right of use asset ?
Correct! Don’t get confused with all the non-refundable nonsense etc. A deposit is added to the value of the right of use asset.
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