ExpertMedium2 marksMultiple Choice
ACCA · Question 20 · Financial Reporting
Section B - Case 1: QuantumQ
QuantumQ also leases a specialized testing facility. The lease commenced on 1 January 20X6 for a 5-year term. Annual payments are $120,000, payable in arrears on 31 December each year. The interest rate implicit in the lease is 6%. (The present value of an ordinary annuity of $1 for 5 years at 6% is 4.212). QuantumQ incurred initial direct costs of $5,000.
What is the carrying amount of the lease liability as at 31 December 20X6 (after the first payment is made)?
Section B - Case 1: QuantumQ
QuantumQ also leases a specialized testing facility. The lease commenced on 1 January 20X6 for a 5-year term. Annual payments are $120,000, payable in arrears on 31 December each year. The interest rate implicit in the lease is 6%. (The present value of an ordinary annuity of $1 for 5 years at 6% is 4.212). QuantumQ incurred initial direct costs of $5,000.
What is the carrying amount of the lease liability as at 31 December 20X6 (after the first payment is made)?
Answer options:
A.
$385,440
B.
$415,766
C.
$420,766
D.
$505,440
How to approach this question
Set up an amortization table for year 1: Opening balance + Interest (at 6%) - Payment = Closing balance.
Full Answer
B.$415,766✓ Correct
Opening lease liability (1 Jan 20X6) = $505,440.
Finance cost (Interest) for 20X6 = $505,440 × 6% = $30,326.
Lease payment made on 31 Dec 20X6 = $120,000.
Closing lease liability (31 Dec 20X6) = $505,440 + $30,326 - $120,000 = $415,766.
Common mistakes
Deducting the payment before calculating the interest.
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