- 7 Marks
FR – L2 – Q39 – Leases
Question
The following information relates to the financial statements of Bela Limited for the year to 31 March 20X4.
On 1 October 20X3, Bela Limited entered into a 5 year lease for a machine from Narbona, agreeing to make payments every 6 months of GH¢29,500 beginning on the 1 October 20X3.
The present value of future lease payments at the commencement of the lease and before any payments are made is GH¢250,000 and the machine is believed to have a useful life of 5 years. The six-month interest rate implicit in the lease is 3.9%.
Required
Explain the correct accounting treatment for the above (with calculations where appropriate).
Answer
A right-of-use asset and lease liability should be recognised at the commencement of the lease in the amount of GH¢250,000.
The right-of-use asset should be recognised as a non-current asset and depreciated over the 5 year lease period/useful life.
By 31st March 20X4, the carrying amount of the right-of-use asset will be GH¢225,000, being the cost of GH¢250,000 less 6 months depreciation.
The lease payments are in advance so the lease liability would be immediately reduced after initial recognition by GH¢29,500. During the 6 months up to the year-end finance costs will be recognised to increase the lease liability.
The finance costs on the lease of GH¢45,000 (Being total payments of (10 × GH¢29,500) – cash price GH¢250,000) will be spread over the lease term using the interest rate implicit in the lease.
Therefore, the finance cost relating to the first 6 months through to 31st March 20X4 is GH¢8,600 (3.9% × (GH¢250,000 – GH¢29,500)).
This will result in a movement on the lease liability as follows:
| 6 months to | Brought forward | Payment (in advance) | Net balance at start | Finance cost | Carried forward |
|---|---|---|---|---|---|
| 31/03/20X4 | 250,000 | (29,500) | 220,500 | 8,600 | 229,100 |
| 30/09/20X4 | 229,100 | (29,500) | 199,600 | 7,784 | 207,384 |
| 31/03/20X5 | 207,384 | (29,500) | 177,884 | 6,937 | 184,821 |
| 30/09/20X5 | 184,821 | (29,500) | 155,321 | 6,058 | 161,379 |
The year-end liability of GH¢229,100 will be split between current liabilities GH¢51,216 (29,500 + (29,500 – 7,784)), and the balance of GH¢178,500 as non-current liabilities.
- Tags: Depreciation, Finance Costs, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
- Level: Level 2
- Uploader: Samuel Duah