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Leasing question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Leasing question

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • October 20, 2016 at 9:11 pm #345269
    gabbi08
    Member
    • Topics: 135
    • Replies: 181
    • ☆☆☆

    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 50

    If 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
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23327
    • ☆☆☆☆☆

    “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 50

    Dr 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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