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On 1 January 20X1, Mosaic sells an item of machinery to Ceramic for $2.8
million. Its fair value was $3 million. The asset had a carrying
amount of $1.2 million prior to the sale.
Mosaic enters into a contract with Ceramic for the right to use the asset
for the next five years. Annual payments of $500,000 are due at the
end of each year. The interest rate implicit in the lease is 10%. The
present value of the annual lease payments is $1.9 million.
Required:
Explain how the transaction will be accounted for on 1 January
20X1 by both Mosaic and Ceramic
My question is that how to deal with FV $3 and Proceeds $2.8 in the double entry.my solution is like this:
DR: Prepayment (followed text book idea) 0.2
Dr: Bank 2.8
Dr: right of use of assets 0.76
Cr: PPE 1.2
Cr: P/L 0.66
Cr: Lease Liability 1.9
Retained 1.9/3.00×1.2=0.76. how to deal with Dr: prepayment 0.2, it may do adjustment: Dr: lease liability (or right of use asset?) 0.2; Cr: Prepayment 0.2 in the next period?Never been asked this before! I think Dr Lease liability Cr Prepayment over term of lease.
I’m so glad that we don’t get complicated numbers (like yours 🙂 ) in the exam
🙂
Thanks, the Lease liability 1.9 with accumulated interest 10% deducts 5 years payment 5×500,000, in the end the lease liability will be nill.
However if Dr Lease liability 0.2; Cr Prepayment 0.2, in the end lease liability will be Debit side balance 0.2, how to deal with it?
Many thanks
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