ACCA Applied Skills · Financial Reporting · Leasing
On 1 January Year 1, Marlow Co starts a three-year lease with payments of $100,000 each 31 December, starting 31 December Year 1. The rate implicit in the lease is 8%, and the three-year annuity factor at 8% is 2.5771. The initial liability is $257,710. What is the non-current lease liability in the statement of financial position at 31 December Year 1, after the first payment is made?
The non-current lease liability is $92,593. The total liability at the end of Year 1 is $178,327. The current portion is only the principal that will be repaid in Year 2, $85,734, not the whole $100,000 payment, which includes interest.
- A$92,593Correct
- B$78,327
- C$178,327
- D$85,734
Explanation
Interest for Year 1 is 257,710 x 8% = 20,617. The liability after payment is 257,710 + 20,617 - 100,000 = 178,327. The current portion is the principal repaid next year, which is 178,327 - 92,593 = 85,734, and the non-current portion is 92,593 (equal to 100,000/1.08 for the final payment). Treating the whole Year 2 payment as current gives 78,327, which is wrong because that payment includes interest.
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