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Hi tutor I have a question regarding this mcq from Sept 2016
This three-year operating lease relates to a fleet of vans. The fair value of the vans is $120,000 and
they have an estimated useful life of five years. The agreement requires Blocks Co to make no payment
in year one and $48,000 in years two and three.
For agreement two, what would be the correct statement of profit or loss entries for the year ended 31 December 20X5?The correct answer is No depreciation and lease rental expense of $32,000
Can you kindly tell me why we are not charging any depreciation? and why is ease rental expense 32000 instead of 16000 (48000/3)Also would we treat it the same way if it were a finance lease instead of an operating one?
Thanks” why we are not charging any depreciation?”
Because it’s an operating lease – we have not capitalised the asset like we would have done for a finance lease
“why is ease rental expense 32000 instead of 16000 (48000/3)”
Total lease payments over 3 years amount to 2 x $48,000 = $96,000
$96,000 / 3 = $32,000
OK?
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