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Finance Lease Accounting Guide

Dawood has correctly accounted for the lease of a machine as a finance lease. It has capitalized the machine at $250,000 and recorded accumulated depreciation of $25,000 for the first 6 months. It has recorded a finance lease obligation of $178,500 non-current and $42,000 current. Interest expense of $9,000 has also been recorded using the sum-of-digits method to allocate interest over the lease term.

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199 views2 pages

Finance Lease Accounting Guide

Dawood has correctly accounted for the lease of a machine as a finance lease. It has capitalized the machine at $250,000 and recorded accumulated depreciation of $25,000 for the first 6 months. It has recorded a finance lease obligation of $178,500 non-current and $42,000 current. Interest expense of $9,000 has also been recorded using the sum-of-digits method to allocate interest over the lease term.

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IAS 17 Question 1

QUESTION 1: IAS 17 LEASES

The following information relates to the financial statements of Dawood for the year to 31 March
[Link] 1 October 2014, Dawood entered into a 5 year lease for a machine from Narbonne,
agreeing to make payments every 6 months of $29,500 beginning on the 1 October. The cash
price of the machine is $250,000 and the machine is believed to have a useful life of 5 years.
Dawood has treated the arrangement as a finance lease. Any finance costs are to be treated using
the sum-of-digits method.

Required:
Explain the correct accounting treatment for the above (with calculations if appropriate).

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IAS 17 Question 1

ANSWER – QUESTION 1: IAS 17 LEASES

Dawood’s Statement of Comprehensive Income for the year ended 31 March 2015 $
Depreciation $ 250,000 / 5 years x 6/12 months 25,000
Interest expense W1 9,000

Dawood’s Statement of financial position as at 31 March 2015 $


Non-current assets
Machine under finance lease 250,000
Less: Accumulated depreciation (25,000)
225,000
Non-current liabilities
Finance lease obligation W1 178,500

Current liabilities
Finance lease obligation $ 20,500 + 21,500 W1 42,000
Interest payable W1 9,000

Explanation: The lease has been correctly classified as a finance lease as it is being leased for
its entire useful economic life which indicates that the risk and rewards of ownership have been
transferred to Dawood. The leased asset should be capitalized and depreciated over 5 year.

Working 1 $
Total MLP $ 29,500 x 10 295,000
Fair value (Cash Price) of asset (250,000)
Total interest to be allocated under sum of digit method over 9 period 45,000

Finance Lease Schedule (Advance Payments)


Balance at Rental Principal Balance at end Interest @ SoD
Time
beginning $ $ element $ $ $
01-10-14 250,000 29,500 29,500 220,500 9,000
01-04-15 220,500 29,500 20,500 200,000 8,000
01-10-15 200,000 29,500 21,500 178,500 7,000

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