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Hello Chris,
When it says that the company ‘owned’ these assets and ‘owed a liability’, what do they actually referring to ‘liability’ as?
Thank you!
Hi,
I’m not 100% sure where exactly you are referring to in the leases chapter, but when we record the right of use asset then we record a corresponding liability. The liability is effectively the present value of the amounts due under the lease contract.
Hope this clears it up for you, let me know if it doesn’t.
Thanks
Hello, Chris!
Could you please help me to clear one moment in a lease question from Kaplan Study text:
“On 1 June Fryatt commenced using an item of plant and machinery under a lease agreement, with three annual payments of $29 000. The first payment was made on 31 May 2017 and has been charged to cost of sales.”
Also we’ve got the amount of CoS from trial balance as of 31 May 2017 which is $324 000.
In the answers while calculating actual amount of CoS to put in P&L, we remove lease payment from $324 000.
My concern is why do we do it? I can understand why we shoudn’t add it to CoS(because CoS $324 000 already includes this payment), but why on earth should we reduce our CoS amount by this lease payment? We actually paid $29 000, and, as I assume, it should appear in our P&L as an expense whether as a part of CoS or as a separate line, but in the answers we simply deduct $29 000 from CoS amount from trial balance and move on.
I’ll really appreciate your help on this one and hope the case is not some rookie mistake I’ve made 🙂
Hi,
All leases are on the balance sheet now, so any payment reduces the outstanding liability and it is not charged through profit or loss. We therefore need to remove the payment from CoS and use it to reduce the value of the liability instead.
The amounts that appear in profit or loss are the interest expense and depreciation charge.
Thanks
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