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MikeLittle.
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- October 20, 2016 at 9:11 pm #345269
Dear Mike,
Could you please help with below question?
Tourmalet sold an item of plant for $50M on the 1st of April 20×4. The plant had a carrying amount of $40M at the date of sale, which was charged to cost of sale. On the same date, Tourmalet entered into an agreement to lease back the plant for the next five years (being the estimated remaining life of the plant) at a cost of $14M per annum payable annually in arrears. An arrangement of this type is normally deemed to have a financing cost of 10% per annum.
What amount will be shown as income from this transaction in the statement of profit or loss for the year ended 30 September 20×4?
Book solution
10/5 *6/12 1 M
Explanation:
This is in substance a secure loan so the asset will be recognized at its new carrying amount of $50M and a lease liability will be setup for the same amount
The 10M increase in carrying amount will be treated as other income deferred over the life of the asset.
If the asset is recognized at the new carrying amount of $50M and leasing liability set up for the same amount (50M) Am I right that the data entry should be
Dr Asset 50
Cr Liability 50If so spreading 10M over the life of the asset, will the amount of Liability/Loan increased?
Why the 10M has been spread out to the life of the asset and not account as interest on the year when the asset was bought back?Sorry but I don t understand the answer and I am completely confused
Could you please shown the data entry of above question?
Thanks in advance for your help
Gabriella
October 21, 2016 at 7:43 am #345303“If the asset is recognized at the new carrying amount of $50M and leasing liability set up for the same amount (50M) Am I right that the data entry should be
Dr Asset 50
Cr Liability 50”No, you’re not right 🙁
Dr Cash 50
Cr Lease liability 50Dr Asset 10
Cr Deferred income 10“Why the 10M has been spread out to the life of the asset and not account as interest on the year when the asset was bought back?”
It’s a profit on disposal of the asset but that profit has to be spread over the life of the lease – it’s what the IAS says
OK?
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