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On 1 October 20X3, Fresco Co acquired an item of plant under a five-year lease agreement. The lease
required an immediate deposit of $2 million with five payments of $6 million paid annually in arrears
commencing on 30 September 20X4. The present value of the future lease payments was $22,746,000. The
agreement had an implicit finance cost of 10% per annum.
What will be the current liability in Fresco Co’s statement of financial position as at
30 September 20X4?
Why do we not include the 2m initial deposit like we do when calculating lease liability for payments in advance?
We do not include the deposit in the liability calculation as it has already been taken account of within the calculations. We are given the present value of FUTURE lease payments and the deposit is not a future lease payment, so would not be included within this figure and would therefore not need to be deducted.
There are some illustrations on this in the class notes, so have a look through.