For the following question below i got $800 000. But the answer key states that the answer is $160 000. Why?
Qn) The everton compnay leased a freehold building for 20 years, the useful life of the building, with effect from 1 january 20X7. At that date the fair value of the leasehold interest was $7.5million of which $6million was attributable to the building. Annual rentals of $800 000 are payable in advance on 1 january.
How much should everton recognise as an operating lease expense in the year ended 31 december 20X7,according to IAS 17 leases?
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Lease
10y ago#1The annual rental is $800
The land is worth $1.5
The building is worth $6
So 1/5 of the rental relates to the land
The question asks how much should Everton recognise as an OPERATING LEASE expense
Can you take it from there?
I took
Leasehold interest element of building rental
= 4/5 × 800 000
= 640 000
Operating lease rental
= 800 000 - 640 000
= 160 000
Am i correct? I just want to clarify why we can't include the land element into our calculation ? Is it because land has no definite useful life ?
As far I see, Building is Freehold and land is Leasehold, so we are stripping land element out, so 800,000 x 1/5 = 160,000.
But that's for first year, What if the question had asked operating expense for the second year?
10y ago#4For each instalment of $800,000, $160,000 is operating lease rental
"Is it because land has no definite useful life "
That's (partly) the reason
For a lease to qualify as a finance lease, not only should the present value of the minimum lease payments by not less than 90% of the asset fair value but the lease term should also be for not less than the asset's useful life
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