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With this question in the study text I got 2 things wrong:
Why was the ROU Asset depreciated over 6 years instead of the shorter 3 years?
1).” The question says…. On 1 June 20X6 Fryatt commenced using an item of plant and machinery under a lease agreement with 3 annual payments of $29,000
Under the terms of the lease Fryatt has the option to extend the lease indefinitely at a reduced rental at the end the 3 years.
The plant has an estimated useful life of 6 years,with negligible value at the end of this period….”
2).LEASE PAYMENT wrongly charged to cos:
-Removal of Lease payment of 29,000 from C.O.SHi,
1) This is trying to catch you out. As there is the option to extend the lease at a reduced rental, the assumption is therefore that we do continue the lease as it would make economic sense. The lease term and life are therefore both six years and we depreciate over this period.
2) Sorry, not too sure what the question is here. Can you explain a bit further please?
Thanks
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