ExpertEasy2 marksMultiple Choice
ACCA · Question 18 · Financial Reporting
Section B - Case 1: QuantumQ
QuantumQ also leases a specialized testing facility. The lease commenced on 1 January 20X6 for a 5-year term. Annual payments are $120,000, payable in arrears on 31 December each year. The interest rate implicit in the lease is 6%. (The present value of an ordinary annuity of $1 for 5 years at 6% is 4.212). QuantumQ incurred initial direct costs of $5,000.
What is the initial carrying amount of the lease liability on 1 January 20X6?
Section B - Case 1: QuantumQ
QuantumQ also leases a specialized testing facility. The lease commenced on 1 January 20X6 for a 5-year term. Annual payments are $120,000, payable in arrears on 31 December each year. The interest rate implicit in the lease is 6%. (The present value of an ordinary annuity of $1 for 5 years at 6% is 4.212). QuantumQ incurred initial direct costs of $5,000.
What is the initial carrying amount of the lease liability on 1 January 20X6?
Answer options:
A.
$510,440
B.
$600,000
C.
$505,440
D.
$455,440
How to approach this question
Multiply the annual payment by the annuity factor. Do not include initial direct costs in the lease liability.
Full Answer
C.$505,440✓ Correct
The initial lease liability is the present value of the future lease payments.
$120,000 × 4.212 = $505,440.
Initial direct costs are added to the Right-of-Use asset, not the lease liability.
Common mistakes
Adding the $5,000 initial direct costs to the lease liability.
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