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Hi sir,
I have a confusion about the concept of taking lower of present value of minimum lease payments & fair value, because in notes it says that implicit interest rate causes the present value of lease payments & residual value to be equal to fair value of asset, so how can the present value of lease payments be higher than fair value of asset & if it is then wouldn’t it be understating the liability if we take the lower of i.e. fair value, in the obligations account, because the liability that exists at present is the present value of lease payments & the interest should be accruing on that amount instead of fair value.I’m sure that I’ve already answered this!
Here we go again ………
On initial acquisition (and I’ve never seen this in an exam question, so I’m really just guessing) the entry would have to be:
Dr TNCA with the fair value
Dr Finance costs with the difference between fair value and present value
Cr Obligations Account with the present value of the minimum lease paymentsOk?
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