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Hello,
I came across this question while solving the mock exams.
This right-of-use lease relates to a new piece of machinery. The fair value of the machine is $220,000. The agreement requires Blocks Co to pay a deposit of $20,000 on 1 January 20X5 followed by five equal annual instalments of $55,000, starting on 31 December 20X5. The implicit rate of interest is 11.65%.
what is the finance cost charged to profit or loss for the year ended 31 December 20X6?
I got this question wrong. The answer provided was as follows:
Year 1 200,000 × 11.65% = 23,300
Year 2 (200,000 + 23,300 – 55,000) × 11.65% = $19,607I know this seems quite straightforward, but do we not use the annual instalments to calculate the PV of the lease liability? and then based on that we would calculate
Im trying to understand why the FV was used to calculate Finance cost?
Could you please help me understand this? I think I interpreted the question incorrectly.Much appreciated!
Thank you!Hi,
You haven’t taken account of the deposit on the lease. This initial payment reduces the lease liability from the 220,000 to the 200,000 that is used in the answer.
Thanks
Hello!
Thank you so much. yes, I see it now, the annual payments are the cash paid and the liability would actually be 200,000
Much appreciated 🙂
Here is the formula I found on Google:-
ROU Asset = Initial Lease Liability + Prepaid Lease Payments – Lease Incentives Received + Initial Direct Costs + Restoration Costs – Any Lease Payments Made at or Before the Commencement Date.But isn’t “Prepaid lease payments” which is added and “Lease Payment made before commencement” which is subtracted the samee thing ??
Whats the 20000 in the question above? “Any Lease Payments Made at or Before the Commencement Date”?
Hi,
I’d ignore what you’ve found on Google and approach the questions in the way that we’ve done so in the class notes and the videos.
Thanks
Then can you please tell me why in the Single Entity question ”Fresco” the deposit of 2m has been included in the ROU instead of deducting as its (deduct lease payment before and after the commencement of lease) and whats the difference b/w subtracting it here and adding it in Fresco? I am probably confusing b/w ROU and Lease liability…
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