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Dear Sir/Madam,
The below question was taken from a past exam paper:
This finance lease relates to a new piece of machinery. The fair value of the machine is $220,000. The
agreement requires Blocks Co to pay a deposit of $20,000 on 1 January 20X5 followed by five equal
annual installments of $55,000, starting on 31 December 20X5. The implicit rate of interest is
11·65%.Yr 1 200,000 x 11·65% = 23,300
Yr 2 (200,000 + 23,000 – 55,000) x 11·65% = $19,607
Answer = 19607In the BPP text book the liability is measured at the present value of future lease payments. So according to this the 55000 should have been discounted for 5years giving the present liability.
Why is the above question was the fair value of the machine used instead? I am a little confused about the situations.
Many Thanks for the help.
IFRS16 has only been in the syllabus from September 2017 onwards, so if this is from a past paper it’s likely it was written under IAS17 rules, the predecessor of IFRS16.
The fact that the question specifies that it’s a finance lease corroborates that, because under IAS17 operating leases and finance leases are treated differently whereas under IFRS16 they’re essentially the same (for the lessee).
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