CIMA F1 Syllabus B. Financial Statements - Lease Accounting Example - Notes ^{3 / 4}

Example

On 1 January 20X2 Cow Co hired a machine for a four-year period under a lease, with payments made in arrears. The machine had a five-year useful life. 

The present value of the lease payments at 1 January 20X2 was $75,000 and the interest rate implicit in the lease was 8%. 

Cow Co incurred initial direct costs of $5,000.

What was the total amount charged to profit or loss in respect of this lease during the year to 31 December 20X2?

• So notice the question asks for P/L - so this comes from:

  Asset Depreciation
  Liability - Interest

  Asset Depreciation:
   75,000 (PV of Lease payments) + 5,000 (Direct costs) = 80,000 / 4 (Lease Term) = 20,000

  Liability Interest:
  75,000 (PV of Lease payments) x 8% (interest rate) = 6,000

  Answer = 26,000