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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?
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?
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?
‘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
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