ExpertMedium2 marksMultiple Choice
ACCA · Question 05 · Financial Reporting
Section A
Nomad Retail operates pop-up retail pods. On 1 January 20X6, Nomad entered into a 4-year lease for a prime location pod. Lease payments are $25,000 per year, payable in advance on 1 January each year. Nomad incurred initial direct costs of $1,500. The interest rate implicit in the lease is 5%. (The present value of an ordinary annuity of $1 for 3 years at 5% is 2.723).
What is the initial measurement of the right-of-use (ROU) asset on 1 January 20X6?
Section A
Nomad Retail operates pop-up retail pods. On 1 January 20X6, Nomad entered into a 4-year lease for a prime location pod. Lease payments are $25,000 per year, payable in advance on 1 January each year. Nomad incurred initial direct costs of $1,500. The interest rate implicit in the lease is 5%. (The present value of an ordinary annuity of $1 for 3 years at 5% is 2.723).
What is the initial measurement of the right-of-use (ROU) asset on 1 January 20X6?
Answer options:
A.
$93,075
B.
$68,075
C.
$94,575
D.
$101,500
How to approach this question
1. Calculate the initial lease liability (PV of future payments). Remember the first payment is in advance, so only 3 payments are discounted. 2. Add the advance payment to find total PV of all payments. 3. Add initial direct costs to get the ROU asset.
Full Answer
C.$94,575✓ Correct
Since payments are in advance, the first payment of $25,000 is paid on 1 Jan 20X6. The remaining 3 payments are discounted.
Lease liability (PV of future payments) = $25,000 × 2.723 = $68,075.
ROU Asset = Initial lease liability ($68,075) + Advance payment ($25,000) + Initial direct costs ($1,500) = $94,575.
Common mistakes
Discounting all 4 payments when the first is paid immediately (in advance).
Practice the full ACCA FR — Financial Reporting Practice Exam 6
32 questions · hints · full answers · grading
More questions from this exam
Q01Section A
AgriTech Innovations is an agricultural technology startup. When preparing its financi...EasyQ02Section A
AstroData Co provides space exploration data analytics. On 1 October 20X5, AstroData e...MediumQ03Section A
Abyss Mining Co operates deep-sea mining equipment. On 1 January 20X3, Abyss acquired ...HardQ04Section A
SkyNet Logistics operates a fleet of commercial delivery drones. Due to new aviation r...MediumQ06Section A
Oceanic Wind PLC constructed an offshore wind turbine which commenced operations on 1 ...Medium