A company that prepares its financial statements according to IFRS leased a piece of equipment on 1 January 2020. Information relevant to the transaction is as follows:
- Five annual lease payments of $25,000, with the first payment due 1 January 2020
- Interest rate on similar company debt is currently 8%
- The fair value of the equipment is $115,000
- Useful life of the equipment is seven years
- The company depreciates other equipment in the same asset class on a straight-line basis
The total expense related to the lease on the company’s 2020 income statement will be closest to:
- $25,000.
- $28,185.
- $22,024.
Solution
B is correct. Under IFRS 16 all leases are classified as a finance lease and must be capitalized.
Using a financial calculator for an annuity due at the beginning of the period:
PV of lease payments: PMT = $25,000, i = 8%, N = 5, Mode = Begin, Compute PV.
PV = $107,803
Therefore, the lease would be capitalized at $107,803.
| Present value of the lease (asset value capitalized and initial liability) | $107,803 | |
|---|---|---|
| Payment 1 January 2020 | –25,000 | |
| Liability value 1 January 2020 | $82,803 | |
| Interest expense in 2020 | 0.08 × $82,803 | $6,624.25 |
| Amortization expense for the year using the lease term as the useful life (no indication that the lease will be renewed beyond the initial term) | $107,803/5 | $21,560.63 |
| Total expense in 2020 | $28,184.88 |
My concern: 25,000 pmt includes 8,624.24 for interest, so liability in 2010= 107,803-8,624.24=99,178.76
where was i wrong?
. Thank you