Last year, Entity A signed another contract with Entity I for the lease of a plant for using in its production process.
The commencement date is scheduled on 1 January 2018. According to the contract, a non-refundable payment of $155,800 is required to pay to Entity I at the commencement date.
The other terms of the contract include:
Lease term of 3 years at an annual rental of $1,100,000 paid in advance
Option to extend for a further 2 years at an annual rental of $1,600 paid in advance
Residual value guarantee at the end of the lease term of 3 years is $3,150.
Residual value guarantee at the end of the lease term of 5 years is $80.
Entity G pays initial direct costs of $15,200 on credit. The interest rate implicit is assumed at 8%. The initial direct costs are settled on 15 February 2018 by cheque.
At the inception date, Entity G is prepared to pay for the residual value to take the ownership of the plant on 31 December 2022.
The lease contract is non-cancellable.
REQUIRED:
Prepare all relevant journal entries of Entity A for the years of 2018 and 2022 in accordance with HKFRS 16 Leases.
I would like to know how to calculate the depreciation on 31-Dec-18. I calculated the right of use asset is $3235092. Therefore, the depreciation supposes should be ($3235092-80)/5=$607002. However, the correct answer from the notes is $808753. Could you explain how to get the correct answer?