Operating Lease

This topic has 5 replies, 2 voices, and was last updated 6 years ago by MikeLittle.

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August 11, 2016 at 6:35 am #332639
aamir2111
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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
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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
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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
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‘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
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cheers! 🙂
August 11, 2016 at 1:52 pm #332702
MikeLittle
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You’re welcome
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