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Question on Lease (in advance)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Question on Lease (in advance)

  • This topic has 0 replies, 1 voice, and was last updated 5 years ago by torresxdd.
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  • January 14, 2020 at 2:54 pm #558670
    torresxdd
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    • Topics: 24
    • Replies: 11
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    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?

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