answer of tyu of ias 17

7/23/2019 Answer of TYU of IAS 17

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Chapter 9

217

Test your understanding answers

Test your understanding 1

Working:

Balanceb/f

Repayment Balance c/f Financecharge10%

Balancec/f

y/e 31.12.X5 69,738 (20,000) 49,738 4,974 54,712

y/e 31.12.X6 54,712 (20,000) 34,712 (*) 3,471 38,183

The non-current liability is the figure in the table to the right of finalrepayment of the next year.

Total liability 54,712

Non-current liability (*) 34,712 ––––––

Current liability (β) 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 berecognised 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 assetat the y/e is £52,303 (£69,738 – £17,435).

Finance costs of £4,974 should be recognised in the statement ofprofit or loss using the implicit rate of 10%.

The year-end finance lease liability of £54,712 should be split in theSFP with £34,712 as non-current and £20,000 as current.

Extracts

ISDepreciation charge 17,435

Finance costs 4,974

SFP

NCA

PPE 52,303

NCL

Finance lease liability 34,712

CL




Chapter 9

219

Finance costs of £1,667 should be recognised in the IS using the sumof digits method

The year-end finance lease liability of £16,667 should be split in theSFP with £13,000 as non-current and £3,667 as current.

Extracts

IS

Depreciation charge 4,400

Finance costs 1,667

SFP

NCA

PPE 17,600

NCL

Finance lease liability 13,000CL



Net investment in lease

TimeGross

£ Discount

factorNet£

Lease payment T1 20,000 1/1.1 18,182

Lease payment T2 20,000 1/1.12 16,529

Lease payment+guaranteed RV T3

20,000+12,000

1/1.13 24,024

––––––

PV of MLPs 58,753

Surplus unguaranteed RV T3 3,000 1/1.13 2,254

––––––

Net investment 61,007

––––––



Leases

220


YearBalance

b/f

InterestIncome@

15%Cash

receivedBalance

c/f

1 5,710 856 (2,000) 4,5662 4,566 685 (2,000) 3,251

3 3,251 488 (2,000) 1,739

4 1,739 261 (2,000) –

–––––

2,290

Statement of financial position extract – end of year one

£

Non-current assets: Net investment in finance leases 3,251Current assets: Net investment in finance leases 1,315

NB: The non-current asset is the balance after the final repaymentnext year. The current asset is the remainder.

Identify: As per IAS 17 the lease is a finance lease asthe FV is equal to the PV of MLPs.

Initially: Derecognise the machine from Genoa's SOFPand recognise a FL receivable.

This is measured at the net investment value of£5,710.

Subsequently: Interest income is recognised over the life of theleases in the statement of profit or loss, i.e.£856 in year 1.

The CA of the asset at year end is £4,566, splitbetween £3,251 NCA and £1,315 CA.



Chapter 9

221


000,85£years7

)6000,70(£000,175£=

×+

Statement of financial position amounts

Year Cash

received Incomeclaimed Difference

Cumulativedifference =

SOFPdeferredincome

£ £ £ £

20X1 175,000 85,000 90,000 90,000

20X2 70,000 85,000 (15,000) 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 overthe lease term of 7 years.

For the y/e 20X1, deferred income of £90,000 should be recognisedand for the y/e 20X2, deferred income of £75,000 should berecognised.


1 January 20X4 £

Record sale Dr Cash 1,000,000

Cr Machine carrying value 750,000

Cr Deferred profit 250,000

Record finance lease

Dr Non-current asset 1,000,000

Cr Lease liability 1,000,000

During year

Interest accrues £1,000,000 × 12% = £120,00

Dr Finance cost 120,000

Cr Finance lease liability 120,000

Year end

Lease repayment Dr lease liability 277,409

Cr Cash 277,409

Depreciate asset £1,000,000/5 yrs = £200,000

Dr Depreciation expense 200,000

Cr Accumulated depreciation 200,000

Release deferred profit £250,000/5 yrs = £50,000

Dr Deferred profit 50,000

Cr Statement of profit or loss 50,000

Rental income in each of7 years of lease term:



Leases

222


(a) Future rentals at market rate

Loss is recognised immediately

Statement of profit or loss for the year ended31 December 20X4

£

Loss on disposal (£8m – £12m) 4,000,000 Dr

Operating lease rentals 650,000 Dr

(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 ended31 December 20X4

£ £

Loss on disposal Nil

Operating lease rentals

Amount paid 650,000

Plus: amortisation of deferred loss£4m/20 years 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 beingrecoverable after more than 12 months.



Chapter 9

223


(a) Raphael can only claim a profit on disposal based upon the fairvalue of the asset:

£

Fair value 9,000,000

Carrying value (3,500,000)

––––––––

5,500,000

(b) The £1m excess profit is credited to the statement of financialposition and released over the life of the lease on a straight linebasis:

$1m/20 years = £50,000

This reduces the rent charged to £430,000.

(c) Statement of profit or loss for the year ended31 December 20X4

£ £

Profit on disposal(based on fair value) 5,500,000 Cr

Operating lease rentals 480,000

Less: release of deferred profit (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.

answer of tyu of ias 17

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