LEASES - OPERATING LEASES

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)