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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Orion Co, a lessee, leases a vehicle fleet for 4 years. The lease liability at 1 January 20X1 is $100,000, discount rate 6%, with $28,859 payable annually in arrears. At 31 December 20X1 Orion pays the first instalment. Right-of-use asset is depreciated straight-line over the lease term with no residual value. What is the total lease-related expense in profit or loss for 20X1 and the lease liability at 31 December 20X1?

The 20X1 expense is $31,000, being $25,000 depreciation plus $6,000 interest, and the closing liability is $77,141. The liability is the opening $100,000 plus interest of $6,000 less the $28,859 payment, so the cash payment is not itself the expense.

  1. AExpense $31,000; liability $77,141Correct
  2. BExpense $28,859; liability $71,141
  3. CExpense $31,000; liability $71,141
  4. DExpense $25,000; liability $77,141

Explanation

Interest = 100,000 x 6% = $6,000. Depreciation = 100,000/4 = $25,000. Total expense $31,000. Liability = 100,000 + 6,000 - 28,859 = $77,141. The cash payment of $28,859 is not the expense, and liability is not reduced by the payment alone.

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