ExpertHard2 marksMultiple Choice
ACCA · Question 05 · Accounting for Transactions
SECTION A
Skyward Aviation entered into a 5-year lease for a maintenance hangar. The annual lease payments are $200,000, payable in advance on 1 January each year. The lease commenced on 1 January 20X6. Skyward's incremental borrowing rate is 6%. The present value of an annuity due of $1 for 5 years at 6% is 4.4651.
What is the initial lease liability recognized on 1 January 20X6, immediately AFTER the first payment is made?
SECTION A
Skyward Aviation entered into a 5-year lease for a maintenance hangar. The annual lease payments are $200,000, payable in advance on 1 January each year. The lease commenced on 1 January 20X6. Skyward's incremental borrowing rate is 6%. The present value of an annuity due of $1 for 5 years at 6% is 4.4651.
What is the initial lease liability recognized on 1 January 20X6, immediately AFTER the first payment is made?
Answer options:
A.
$893,020
B.
$693,020
C.
$1,000,000
D.
$800,000
How to approach this question
Calculate the total present value of all payments. Because payments are in advance, subtract the first payment made on day 1 to find the remaining liability.
Full Answer
B.$693,020✓ Correct
Under IFRS 16, the lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date. Total PV = $200,000 * 4.4651 = $893,020. Since the first payment is made on 1 January 20X6 (in advance), the remaining liability immediately after this payment is $893,020 - $200,000 = $693,020.
Common mistakes
Forgetting to deduct the initial advance payment from the total present value to find the liability balance.
Practice the full ACCA FR — Financial Reporting Practice Exam 3
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