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ACCA Applied Skills · Financial Reporting · Leasing

Tolan Co leases machinery and, at the commencement date, measures its lease liability at $240,000. It pays initial direct costs of $5,000. It receives a $12,000 incentive from the lessor. It estimates $8,000 for dismantling the machine and restoring the site at the end of the lease, and this obligation is recognised as a provision. No payments were made at or before commencement. What is the initial carrying amount of the right-of-use asset?

The right-of-use asset is $241,000. It starts with the lease liability, adds initial direct costs and estimated restoration costs, and deducts lease incentives received from the lessor: 240,000 + 5,000 + 8,000 - 12,000.

  1. A$241,000Correct
  2. B$233,000
  3. C$265,000
  4. D$236,000

Explanation

ROU asset = lease liability 240,000 + initial direct costs 5,000 + restoration costs 8,000 - incentive received 12,000 = 241,000. Omitting the restoration cost gives 233,000. Adding the incentive instead of deducting it gives 265,000.

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