Chapter 9

Test your understanding answers

Test your understanding 1
Working:
Balance
b/f

Repayment

y/e 31.12.X5

69,738

(20,000)

y/e 31.12.X6

54,712

(20,000)

Finance
charge
10%

Balance
c/f

49,738

4,974

54,712

34,712 (*)

3,471

38,183

Balance c/f

The non-current liability is the figure in the table to the right of final
repayment of the next year.
Total liability
Non-current liability (*)
Current liability ()

54,712
34,712

20,000

Per IAS 17, this lease should be treated as a finance lease because
[insert reason].
Initially, an asset and a corresponding finance lease liability should be
recognised at the lower of FV and PV of MLPs being 69,738.
The asset should be depreciated over the shorter of its useful life and
lease term being 4 years, giving rise to a depreciate charge of
17,435 (69,738 / 4 years) per annum. Carrying amount of the asset
at the y/e is 52,303 (69,738 17,435).
Finance costs of 4,974 should be recognised in the statement of
profit or loss using the implicit rate of 10%.
The year-end finance lease liability of 54,712 should be split in the
SFP with 34,712 as non-current and 20,000 as current.
Extracts
IS
Depreciation charge
Finance costs

17,435
4,974

SFP
NCA
PPE

52,303

NCL
Finance lease liability

34,712

CL
Finance lease liability

20,000

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Leases

Test your understanding 2

Step 1: Calculate the total finance charge

27,000
(22,000)

5,000

Total lease payments

Fair value of asset
Total finance charge

Step 2: Calculate the denominator of the S.O.D fraction

n(n + 1)
5(5 + 1)
=
= 15
2
2

where n = the number of interest-bearing periods

For payments in arrears, the number of interest-bearing periods

= the number of repayments

For payments in advance, the number of interest-bearing

periods = the number of repayments 1

Step 3: Apply the S.O.D. fraction to the total finance charge

In the first period, the numerator of the fraction is n, in the second
n 1 etc.
y/e 31.12.X1

5/15 5,000 = 1,667

y/e 31.12.X2

4/15 5,000 = 1,333

Step 4: Use the finance charge allocation within the liability

table.

Fair value
Initial deposit
y/e 31.12.X1
y/e 31.12.X2

Liability
b/f
22,000
(2,000)
20,000
16,667

Finance
charge

Repayment
(31 December)

Liability
c/f

1,667
1,333

(5,000)
(5,000)

16,667
13,000

Per IAS 17, this lease should be treated as a finance lease because
[insert reason].
Initially, an asset and a corresponding finance lease liability should be
recognised at the lower of FV and PV of MLPs being 22,000.
The asset should be depreciated over the shorter of its useful life and
lease term being 5 years, giving rise to a depreciate charge of 4,400
(22,000 / 5 years) per annum. Carrying amount of the asset at the
y/e is 17,600 (22,000 4,400).

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Finance costs of 1,667 should be recognised in the IS using the sum

of digits method
The year-end finance lease liability of 16,667 should be split in the
SFP with 13,000 as non-current and 3,667 as current.
Extracts
IS
Depreciation charge
Finance costs

4,400
1,667

SFP
NCA
PPE

17,600

NCL
Finance lease liability

13,000

CL
Finance lease liability

3,667

Test your understanding 3

Net investment in lease

Lease payment
Lease payment
Lease payment+
guaranteed RV

Surplus unguaranteed RV

Time
T1
T2
T3

Gross

20,000
20,000
20,000
+12,000

PV of MLPs
T3
3,000
Net investment

Discount
factor
1/1.1
1/1.12
1/1.13

1/1.13

Net

18,182
16,529
24,024

58,753
2,254

61,007

219

Leases

Test your understanding 4

Year
1
2
3
4

Balance
b/f
5,710
4,566
3,251
1,739

Interest
Income@
15%
856
685
488
261

2,290

Cash
received
(2,000)
(2,000)
(2,000)
(2,000)

Balance
c/f
4,566
3,251
1,739

Statement of financial position extract end of year one

Non-current assets: Net investment in finance leases
Current assets: Net investment in finance leases

3,251
1,315

NB: The non-current asset is the balance after the final repayment
next year. The current asset is the remainder.
Identify:

As per IAS 17 the lease is a finance lease as

the FV is equal to the PV of MLPs.

Initially:

Derecognise the machine from Genoa's SOFP

and recognise a FL receivable.
This is measured at the net investment value of
5,710.

Subsequently:

Interest income is recognised over the life of the

leases in the statement of profit or loss, i.e.
856 in year 1.
The CA of the asset at year end is 4,566, split
between 3,251 NCA and 1,315 CA.

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Chapter 9

Test your understanding 5

Rental income in each of
7 years of lease term:

175,000 + (70,000 6)
= 85,000
7 years

Statement of financial position amounts

Year
20X1
20X2

Cash
received

175,000
70,000

Income
claimed

85,000
85,000

Difference

90,000
(15,000)

Cumulative
difference =
SOFP
deferred
income

90,000
75,000

Per IAS 17, treat this as an operating lease. Rental income of

85,000 should be recognised in the IS on a straight line basis over
the lease term of 7 years.
For the y/e 20X1, deferred income of 90,000 should be recognised
and for the y/e 20X2, deferred income of 75,000 should be
recognised.

Test your understanding 6

1 January 20X4
Record sale

Dr Cash
Cr Machine carrying value
Cr Deferred profit

1,000,000
750,000
250,000

Dr Non-current asset
Cr Lease liability

1,000,000
1,000,000

Record finance lease

During year
Interest accrues

Year end
Lease repayment
Depreciate asset

Release deferred profit

1,000,000 12% = 120,00

Dr Finance cost
Cr Finance lease liability
Dr lease liability
Cr Cash
1,000,000/5 yrs = 200,000
Dr Depreciation expense
Cr Accumulated depreciation
250,000/5 yrs = 50,000
Dr Deferred profit
Cr Statement of profit or loss

120,000
120,000
277,409
277,409
200,000
200,000
50,000
50,000

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Leases

Test your understanding 7

(a)

Future rentals at market rate

Loss is recognised immediately
Statement of profit or loss for the year ended
31 December 20X4

4,000,000 Dr
650,000 Dr

Loss on disposal (8m 12m)

Operating lease rentals
(b)

Future rentals at below market rate

Loss is deferred and amortised over the life of the lease.
Statement of profit or loss for the year ended
31 December 20X4

Loss on disposal
Operating lease rentals
Amount paid
Plus: amortisation of deferred loss
4m/20 years

Nil

650,000
200,000
850,000

Statement of financial position as at 31 December 20X4

Deferred loss on disposal (4m 200,000)

3,800,000

3,600,000 of this loss would be separately disclosed as being

recoverable after more than 12 months.

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Chapter 9

Test your understanding 8

(a)

Raphael can only claim a profit on disposal based upon the fair
value of the asset:

9,000,000
(3,500,000)

5,500,000

Fair value
Carrying value

(b)

The 1m excess profit is credited to the statement of financial

position and released over the life of the lease on a straight line
basis:
$1m/20 years = 50,000
This reduces the rent charged to 430,000.

(c)

Statement of profit or loss for the year ended

31 December 20X4

Profit on disposal
(based on fair value)
Operating lease rentals
Less: release of deferred profit

5,500,000 Cr
480,000
(50,000)

430,000 Dr

Statement of financial position as at 31 December 20X4

Deferred profit (1m 50,000)

950,000

900,000 of this liability is non-current.

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