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Sir, Please consider the below:
(All figures in dollars)
Under operating lease. Lets say an asset requires a non refundable deposit of 4000 and annual payments of 5000 for the next four years. The charge on I/S for the first year is (4000+(5000*4))/4=6000. But the payment done is 5000+4000= 9000. Therefore the prepaid expenses is 9000-6000= 3000 at the end of year 1. What happens to this prepaid expense next year when 6000 is again charged on I/S? Does 1000 get written off and 2000 remain as prepaid expense at end of year 2? Or how is it treated in the coming year?
Apologies if this was covered in your lectures. I have not watch all lectures.
For the second year the double entry will be …
Dr operating lease cost 6,000
Cr cash 5,000
Cr prepaid operating lease account 1,000
That will leave just 2,000 in the prepayment account of which 1,000 is a current asset and the other 1,000 is a deferred asset
Yes, Got it. 🙂