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Sale and lease back

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Sale and lease back

  • This topic has 3 replies, 2 voices, and was last updated 2 years ago by Stephen Widberg.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 27, 2022 at 1:30 pm #672747
    jingdong
    Participant
    • Topics: 89
    • Replies: 115
    • ☆☆☆

    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?

    November 29, 2022 at 6:20 pm #672885
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3411
    • ☆☆☆☆☆

    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

    🙂

    November 29, 2022 at 7:53 pm #672886
    jingdong
    Participant
    • Topics: 89
    • Replies: 115
    • ☆☆☆

    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

    November 30, 2022 at 4:38 pm #672958
    Stephen Widberg
    Keymaster
    • Topics: 16
    • Replies: 3411
    • ☆☆☆☆☆

    I think you would use an IRR that would reduce the liability to 2. So not 10%. I can’t find any examples anywhere.

    🙂

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