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Operating Lease – J15Q3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Operating Lease – J15Q3

  • This topic has 5 replies, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 6 posts - 1 through 6 (of 6 total)
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  • August 11, 2016 at 6:35 am #332639
    aamir2111
    Participant
    • Topics: 123
    • Replies: 85
    • ☆☆☆

    Dear Mike,

    I need your help on J15Q3 of F7.

    as per trial balance of Clarion on 31/3/15 operating lease (note v)= 2000.

    As per additional note (v): Clarion renewed operating lease on property on 1st April’14. The operating lease payment represents an annual payment in advance of 1000 and lease premium of 1000. The lease is for 4 years and the operating lease expense should be included in cost of sales.

    How do we treat it in financial statements?

    August 11, 2016 at 7:34 am #332649
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    The $1,000 premium relates to and should be spread over the 4 year lease period

    The other $1,000 relates to each of the 4 years of the lease period

    You haven’t told me the year end (again!) but, if the payment took place on day 1 of the financial year, the accounting would be an expense of $1,250 and a prepayment of $750

    OK?

    August 11, 2016 at 1:07 pm #332691
    aamir2111
    Participant
    • Topics: 123
    • Replies: 85
    • ☆☆☆

    year end is 31/3/15, as mentioned above.

    1 – What exactly is a premium on lease? I thought may be it was a deposit. But I guess, I was wrong.

    2 – So for premium, we show 250 as expense and reduce the same from cash, right?

    For lease expense:
    deduct 1000 from SoPL & from cash.

    For advance lease payment:
    deduct 1000 from cash and show prepayment in SOFP.

    is that right?

    August 11, 2016 at 1:28 pm #332695
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    ‘What exactly is a premium on lease?’ – it’s an amount paid to persuade the owner to lease the asset to you and not to anyone else!

    ‘…and reduce the same from cash, right…’ – No – how can your educe the amount of cash? You paid that $1,000 so you have to credit the cash

    ‘For advance lease payment:
    deduct 1000 from cash and show prepayment in SOFP.’

    NO! It’s as I wrote in my last response

    Dr PorL expense $1,250
    Dr Prepayment $750
    Cr Cash $2,000

    August 11, 2016 at 1:48 pm #332701
    aamir2111
    Participant
    • Topics: 123
    • Replies: 85
    • ☆☆☆

    cheers! 🙂

    August 11, 2016 at 1:52 pm #332702
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    You’re welcome

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