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Dear sir,
I practiced a question where I found that there was lease agreement that required three annual payment at year end. The question mentioned that this was charged to cost of sales. In solution this was then removed from cost of sales and the whole question followed a lease liability table.
Why they removed from cost of sales? What is the correct accounting for such payments? As the book has only mentioned lease amortization schedule or lease liability table. What are accounting entries for these regular lease payments?
Thank you for your support.
Hi,
In this instance the accounting treatment has been done incorrectly as the annual payments should not go through profit or loss (Cost of Sales in this instance). The payments should reduce the value of the lease liability recognised on the SFP, where we are using the amortised cost accounting treatment.
Thanks
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