Hi Can anyone tell me why the question 24 Bulwell Aggregates Co on page 443 of the study text BPP 2019/2020 uses the initial measurement of the right of use asset for the measurement of the liability also. Isn't it supposed to use the present value of the lease payments?
Thanks , I've pasted a copy of the question below.
Bulwell - IFRS 16 - Lease in Arrears
Bulwell Aggregates Co entered into a 3 year contract to obtain 3 lorries on 1 January 20X1. The contract met the IFRS 16 criteria to be classified as a lease
and the intitial measurement of the right of use asset was $54,000. The agreement states that Bulwell Aggregates will pay a deposit of $9,000 on 1 January 20X1, and
two annual instalments of $24,000 on 31 December 20X1, 20X2 and a final instalment of $20,391 on 31 December 20X3. Ownership will pass to Bulwell at the end of the lease term.
Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on 31 December each year.
The depreciation policy of Bulwell Aggregates Co is to depreciate the right of use asset arising from the lease of vehicles over a four year period using the straight line method.
Required
Show the entries in the statement of profit or loss and statement of financial position for the years 20X1, 20X2 and 20X3. This is the only lease transaction undertaken by the
company.
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FRQuestion Help F7
You are right, Lease liability is calculated as present value of all cash flows. Similarly, in absence of any down payment by lessee or any other settlement against the Right to Use asset by lessor, we assume that the asset's value is the value of lease liability.
So the value of right to use asset of $54,000 basically represents the value of lease liability in above question. You can also calculate the lease liability as follows, which equals $54,000.
Lease Liability = ($9,000*1)+[$24,000*(0.800+0.640)]+($20,391*0.512) = $54,000
Thanks so much :)
You are welcome.
Bulwell Aggregates Co entered into a 3 year contract to obtain 3 lorries on 1 January 20X1. The contract met the IFRS 16 criteria to be classified as a lease
and the intitial measurement of the right of use asset was $54,000. The agreement states that Bulwell Aggregates will pay a deposit of $9,000 on 1 January 20X1, and
two annual instalments of $24,000 on 31 December 20X1, 20X2 and a final instalment of $20,391 on 31 December 20X3. Ownership will pass to Bulwell at the end of the lease term.
Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on 31 December each year.
.
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