- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Hello Sir,
Your help on this question will be appreciated.
On 1st Jan 2004 Badger co entered into a lease agreement to lease an item of machinery for 4 years with rental of 210,000$ payable annually in arrears. The asset has a useful life of 5 yrs and at the end of the lease term legal ownership will pass to Badger co. The fair value of the asset at the inception of the lease was $635,000 and the Internet rate implicit in the lease is 12.2%. For the year ended 31st Dec 2004, Badger co has accounted for this lease as an operational lease and recorded the payment of $210000 as a operating expenses. This treatment was discovered during 2005.
What will the adjustment to retained earning b/fwd be?
A) $5,530 credit
B) $132,530 credit
C)$210,000 debit
D)$nilMy answer is B, but Kaplan answer is A.
My Workings( interest payment of 12.2% *635,000= 77470
210,000- 77470=132530 to be credited.Thanks for your time.
But what about the depreciation of $635,000 / 5 years (the shorter of lease term and useful life IF the asset is returned to the lessor. If it’s probable that it will remain with the lessee, then it’s depreciated over its useful life)
So you have $132,530 and we need to deduct from that figure $635,000 / 5 = $127,000
That leaves us with a credit to profit or loss of $5,530
OK?
- The topic ‘Kaplan- Lease agreement question’ is closed to new replies.