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Hi Chris,
You make FR and SBR very interesting – its good to have a giggle while learning.
There is a question in the Kaplan kit which answer I do not understand. Why is there a liability for deferred income here of 90k?
Question:
Oroc hires out industrial plant on long-term operating leases. On 1 January 20X1, it entered into a seven-year lease on a mobile crane. The terms of the lease are $175,000 payable on 1 January 20X1, followed by six rentals of $70,000 payable on 1 January 20X2 –20X7. The crane will be returned to Oroc on 31 December 20X7. The crane originally cost $880,000 and has a 25-year useful life with no residual value.
Required: Discuss the accounting treatment of the above in the year ended 31 December 20X1
Answer:
Oroc holds the crane in its statement of financial position and depreciates it over its useful life. The annual depreciation charge is $35,200 ($880,000/25 years).Rental income must be recognised in profit or loss on a straight line basis. Total lease receipts are $595,000 ($175,000 + ($70,000 × 6 years)). Annual rental income is therefore $85,000 ($595,000/7 years).
The statement of financial position includes a liability for deferred income of $90,000 ($175,000 –$85,000)
Hi,
Thanks for the kind comments, glad the lectures keep you entertained!
The deferred income arises as the first payment made of $175,000 is greater than what is recognised each year with regards to the annual rental income of $85,000.
In 20X1, the cash received of $175,000 at the start of the year is recorded as deferred income when it is received DR Bank 175,000 CR DI 175,000. We then release $85,000 to profit or loss, DR DI 85,000 CR SPL 85,000.
In 20X2 cash of $70,000 is received and $85,000 of rental income is recorded. The difference of $25,000 is a further reduction in the deferred income. DR Bank 70,000 DR DI 15,000 CR SPL 85,000.
Hope that clears it up a bit for you.
Thanks
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