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Is it still have the method of using the proportional right of use asset?
Cherry sold a building for its fair value of $5 million to a finance company on 30 November
20X6 when its carrying amount was $3.5 million. The building was leased back from the
finance company for a period of 5 years. The remaining useful life of the building was
deemed to be 25 years so it can be concluded that control of the building has transferred to
the finance company. Lease rentals are $440,000 payable annually in arrears. The interest
rate implicit in the lease is 7%. The present value of the annual lease payments is $1.8
million. Cherry has recorded the cash proceeds, derecognised the building, and recorded a
profit on disposal of $1.5 million in the statement of profit or loss. No other accounting
entries have been posted.
My answer is that: View on the Lessee’s point.
Dr ROU assets $1.8m (Depreciation follow in next year)
Cr Financial Lease liability $1.8m (interest paid follow in next year and cash paid of $440)
Dr cash $5m
Cr PPE $3.5m
Cr gain on disposal $1.5m
But the Kit book answer is that
The correcting entry required is as follows:
Dr Right of use asset $1.26m
Dr Profit or loss $0.54m
Cr Lease liability $1.80m
We do need to follow which method Sir, I am confusing about this and not sure which method is the newly created.
Thank you so much.
Please don’t copy and paste whole questions in this forum. 🙂
Right of use asset should be:
PVFLP / FV x CA
This ties in with your kit.
I quite like your answer and wish you had written the standard, but, alas, it’s wrong!