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P2-D2.
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sooha
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Pennyroyal Co acquired an item of plant under a lease on 1 April 20X5. An initial payment of $2,000,000 is
paid on 1 April 20X5 and the present value of the future lease payments, is $7,092,000. Pennyroyal Co will
make four further annual payments of $2 million paid in advance commencing 1 April 20X6. the useful life of
the plant is deemed to be eight years. Pennyroyal Co will obtain legal title of the asset following the final
payment.
The interest rate implicit in the lease is 5% per annum.
What is the total charge to appear in the statement of profit or loss in respect of this lease for the year ended
31 March 20X6?please help I couldn’t understand .
regarding the lease liability shouldn’t i deduct the 2000000 from 7,092,000 before i add the interest rate as it is payment in advance ?? kindly explain
P2-D2
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Hi,
No. This is a common mistake seen and you need to go back to the class notes for the details but the key is that the terminology says “future lease payments” and hence the initial deposit has already been deducted.
Thanks
sooha
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