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When there is a lease payment in advance, how do you determine whether the first payment is deducted from the balance in the first year or it’s excluded and classed as ‘already paid’.
I was working through the cima study text and on the questions it states : “GBT entered into a four year lease on 1 January 20X0…….advance – first payment made on 1 January 20X0” in this example when calculating the lease liability in the first year the payment is classed as “already paid” hence not taken off the balance in the first year.
However when doing the question bank the question states , “GTA entered into an agreement to lease an item of plant on 1 January 20X2………..This lease requires the annual payment in advance of $400,000”
The answer scheme here takes off the 400k in the lease liability table in the first year from the overall balance.
Another example is where the question states “five annual instalments of $120,000 are payable at the start of each year”
Again here the first payment of 120k in the answer is deducted from the balance in the lease liability table.
How do we distinguish between the two variations ?
I think you have to read very carefully the value of the lease liability given. If it says the present value of future lease payments then this is looking at future payments and so the initial payment must already have been made and deducted, it is not a future payment.
If it gives the present value of the lease payments then this is looking at all of the lease payments, including the very first one due and therefore it must then be deducted.
I’m seeing a lot of these daft questions on leases testing you on picky little point across both ACCA and CIMA but I think that once you identify the narrative it becomes a bit easier. It is just someone somewhere trying to be too smart and picky.
Thanks for clarifying
You’re welcome! Bet of luck with the exam.