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An entity leases a motor vehicle. The present value of the minimum lease payments is $27,355 and the rate implicit in the lease is 10%.The terms of the lease require three annual rentals to be paid of $10,000 each at the start of each year. At the end of the first year of the lease what amount will be shown for the lease liability in the company’s statement of financial position under the headings of current liabilities and non-current liabilities?
Current liabilities Non-current liabilities
A $9,091 $10,000
B $10,000 $10,900
C $10,900 $10,000
D $10,000 $9,091I’ve stared at this question for an hour and asked my friends and they still didn’t get the answer, I need desperate help and explanation on this. Thank you
Hi,
Is the answer A? I’d recommend looking at a lease payable table with payments in advance to get things started.
You then need to deduct the payment and apply the 10% interest to the outstanding balance and then use the shortcut covered in the class notes to be able to split the closing lease liability. Remember to look at the final payment of the next year and the number immediately to the right of this figure is the NCL.
See how you get on and let me know how it all goes.
Thanks
Lease liability at end year 1
= 27,355 – 10,000 + 0.1(27,355-10,000)
= $19,091Lease liability at end year 2
= 19,091 – 10,000 + 0.1(19,091-10,000)
= $10,000Non current component is what remains outstanding after a year = $10,000
Current component is what is extinguished in a year =$9,091 (19,091 – 10,000).
Hope that helps!
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