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Hi Mike,
As you said, the accounting entry for recognizing asset is Asset a/c Dr and Obligations a/c Cr. The amount will be equal to the lower of the Fair value of the asset or the P.V. of the minimum amount of the lease payment.
Won’t the FV of the asset and the PV of the min. lease payment be the same figure if the discount rate that we are using is the interest rate implicit in the lease?
Then when does the difference in these 2 amounts occur? Is it when the interest paid is not equal to the implicit rate?Also, in E.g. 1, why did we do reconciliation between just 6 installments and not all the 7 of them? Is it because the 1st installment was pertaining to the current year, therefore was a current liability?
I noticed that there is no lecture on operating lease and the remaining parts of the chapter after e.g. 2. Is this meant for just additional reading or is it a part of examination portion?
Thanks.
ABWhen we lease an asset we show it as our own asset i.e. Debit the asset and Credit the obligation. However, if we rent an equipment for just few months, how will we treat it in this case?
Won’t the FV of the asset and the PV of the min. lease payment be the same figure if the discount rate that we are using is the interest rate implicit in the lease?
Why should they be the same? The lessor can charge whatever rate s/he wants so unless the rate charged as applied to the capital payments happens coincidentally to be the same as the fair value, then the two amounts will differ
Also, in E.g. 1, why did we do reconciliation between just 6 installments and not all the 7 of them? Is it because the 1st installment was pertaining to the current year, therefore was a current liability?
Isn’t it because we’re doing this exercise at the end of the first year so that first instalment has gone and there are only 6 years left to be paid?
I noticed that there is no lecture on operating lease and the remaining parts of the chapter after e.g. 2. Is this meant for just additional reading or is it a part of examination portion?
Operating leases are in the syllabus but they are very, very rarely asked
When we lease an asset we show it as our own asset i.e. Debit the asset and Credit the obligation. However, if we rent an equipment for just few months, how will we treat it in this case?
Does the rental satisfy the criteria for being a finance lease? If yes, then treat as a finance lease
If no, then it’s an operating lease
Thanks Mike.
Your answers always are helpful which makes my understanding of lectures much clearer 🙂
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