Question 1

SECTION B

CASE SCENARIO: Zephyr Renewables Co (Zephyr) operates wind farms. On 1 January 20X5, Zephyr entered into a 20-year lease for land to build a new wind farm. Annual lease payments are $500,000, payable in arrears on 31 December. Zephyr's incremental borrowing rate is 5% (the PV of an ordinary annuity of $1 for 20 years at 5% is 12.4622). Zephyr incurred initial direct costs of $100,000. On the same date, Zephyr received a $2,000,000 government grant to assist with turbine construction. The turbines have a 10-year useful life. At 31 December 20X5, grid connection issues indicated potential impairment of a separate cash-generating unit (CGU). The CGU's carrying amount is $15,000,000 (including $500,000 goodwill). The CGU's value in use is estimated at $12,000,000 and its fair value less costs of disposal is $13,000,000.

QUESTION: What is the initial cost of the Right-of-Use (ROU) asset recognized on 1 January 20X5?

Accepted Answer

Start with the initial lease liability and add any initial direct costs incurred by the lessee.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to add the initial direct costs to the ROU asset.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

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