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On 1 Jan 20×6, F entered into a contract for the right to use a machine for a 4 yr period. the contract meets the definition of a lease under IFRS 16 Lease. F paid a deposit of $700,000 on the commencement of a lease on 1 Jan 20×6 and a further 3 instalments of $700,000 are payable annually in advance. the PV of future lease payments was $1,871,100. the interest rate implicit in the lease is 6%.
what amount will appear as NCL of the lease in SOFP at 31 Dec 20×6?the ans is $1283.
kindly help to solve this question. i am getting 1,241,366 as answerI believe there must be a breakdown of the answer amount calculated in the BPP Kit. When asking questions here, kindly specify what is it in the answer that you don’t understand. Simply copying question and asking for an answer is not enough.
As the first instalment is already paid at the start of lease, therefore the lease liability will be calculated as the present value of remaining 3 instalments, which amounts to $1,871,100.
The lease liability must be unwind at each year end using the implicit rate, and any repayment of the liability must be deducted to arrive at the carrying amount to be included in SOFP. All these rules are explained in the free lectures.
Lease liability at 1 Jan 20X6 = $1,871,100
Add: Unwinding of lease liability = $1,871,100*6% = $112,266
Less: Repayment (annual instalment) = ($700,000)
Carrying amount in SOFP = $1,283,366Are you clear now?
hello
Sorry for the mistake, will be careful next time.
i understood your calculation but i am having difficulty as the question is on advance instalment so shouldn’t we have calculated bal b/d – payment =subtotal + interest to get the answer.
but i found this question approaching the arrears technique
or i am wrongly understanding the question?
will be thankful if you reply back, Sir
Hi.
There is no need to apologise. I am not the tutor, just a fellow student. The tutor answers questions posted in Ask the Tutor Forum, so if you wish to ask him directly, please start a thread there.
The wording of the question is quite confusing, and i understand it will be difficult for anyone to understand the question clearly, unless there is a detailed answer with proper workings is provided. Even i misunderstood the question first time.
Do not worry if you have made a mistake. I’ll try my best to explain the question in simple terms.Year 1:
Balance b/f at 1 Jan 20X1 = $700,000 + $1,871,100 = $2,571,100
Less: Instalment on 1 Jan 20X1 = ($700,000)
Subtotal = $1,871,100
Add: Interest @ 6% = $112,266
Balance c/f at 31 Dec 20X1 = $1,983,366Year 2:
Balance b/f at 1 Jan 20X2 = $1,983,366
Less: Instalment on 1 Jan 20X2 = ($700,000)
Subtotal = $1,283,366
Add: Interest @ 6% = $77,002
Balance c/f at 31 Dec 20X2 = $1,360,368Therefore, the Non-current liability (NCL) at 31 Jan 20X1 will be $1,283,366.
Are you clear now?
Hi
Thanks for the reply
so, to obtain the lease payment at the start, we should first add the amount paid at commencement?.
i thought that amount was to be added when calculating the right of use of asset.
The lease liability is calculated as the present value of all instalments, discounted at implicit rate. There were 4 instalments, all of these must be incorporated for initial measurement of the liability.
The first instalment was due immediately at commencement, therefore the discount factor for this first payment would be 1, which would give us a present value of the exact $700,000.
The remaining 3 instalments are payable in future, hence their present values would be different.
When calculating right to use asset, the first instalment will definitely be part of the initial measurement.
For lease liability, the first instalment doesn’t make much difference. As you can see, the calculation i did earlier gave the exact same result as the one later. This is probably why examiner did not include this amount in the calculation.
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