Question 1

SECTION A

Skyward Aviation entered into a 5-year lease for a maintenance hangar. The annual lease payments are $200,000, payable in advance on 1 January each year. The lease commenced on 1 January 20X6. Skyward's incremental borrowing rate is 6%. The present value of an annuity due of $1 for 5 years at 6% is 4.4651.

What is the initial lease liability recognized on 1 January 20X6, immediately AFTER the first payment is made?

Accepted Answer

Calculate the total present value of all payments. Because payments are in advance, subtract the first payment made on day 1 to find the remaining liability.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to deduct the initial advance payment from the total present value to find the liability balance.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

More questions from this exam