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Question) A company is leasing an asset under a 4 year operating lease. The initial non-refundable deposit is $1000 on 1 January of year 1 followed by 4 annual payments in arrears of $1000 each on 31 December of years 1,2,3,4.
What is the charge to the statement of profit or loss and any amount to appear in the statement of financial position at the end of year 1 lease?
5000÷ 4yrs = 1250 expense a year
Therefore, prepayment is only
$1250 -$1000 = $250 right sir ?But in the answer sheet it shows a prepayment of $750. Could you explain why sir?
Whether the annual payments are made in arrears or in advance , won’t matter for a operating lease right sir ?
“Whether the annual payments are made in arrears or in advance , won’t matter for a operating lease”
Correct
Re the first part of your post, $1,000 + $1,000 is paid in year 1
But the total amount payable over the lease period is $5,000 and that equates to $1,250 each year for those 4 years
So the prepayment is $2,000 – $1,250 = $750
The alternative view is to say that the $1,000 deposit relates to all 4 years whereas the $1,000 instalment is specifically a year 1 expense
Thus, for year 1, we have $1,000 / 4 + $1,000 as the expense and the prepayment is the remaining 3/4 of that $1,000 deposit
OK?
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