ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Orion plc, a lessor, grants a 5-year finance lease on equipment with a fair value of $500,000. Annual payments are made in arrears and the rate implicit in the lease is 8%. At the end of year 1, after receiving the first payment of $125,226, how much finance income does Orion recognise for year 1?
Finance income for year 1 is $40,000, calculated as 8% of the opening net investment of $500,000. The remainder of the first receipt reduces the lease receivable. IFRS 16 requires lessors to recognise finance income to give a constant periodic rate of return on the net investment.
- A$40,000Correct
- B$45,018
- C$100,000
- D$125,226
Explanation
The net investment at the start equals the fair value of $500,000 because the implicit rate is set to give this figure. Finance income for year 1 is 8% x $500,000 = $40,000 and is recognised to give a constant periodic rate of return on the net investment. $45,018 would wrongly be 8% of the payment, and $125,226 treats the whole receipt as income instead of splitting it between interest and capital.
Did you get it right without looking?
One question tells you little. A timed set on Leases shows your real accuracy, how long you take and where you lose marks.
More Leases questions
- Dunmore plc, a lessee, leases a building for 10 years with an option to extend for 5 years. At commencement it was not reasonably certain th…
- Cobalt Ltd leases machinery with a lease liability of 800,000 and a right-of-use asset carrying amount of 750,000. A modification partially …
- Orion Co leases machinery for 8 years. In year 3 the lessor and Orion agree to add the right to use a second identical machine for the remai…
- Zenta Co enters a 4-year lease of equipment on 1 January 20X1 with annual payments of $10,000 in arrears. The rate implicit in the lease is …
- Omega Co is a lessee. It signs a contract to use 30% of the capacity of a pipeline owned by Sigma Co for four years. The capacity is not phy…
- 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 pa…