ExpertMedium2 marksMultiple Choice
ACCA · Question 19 · 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 depreciation charge for the Right-of-Use (ROU) asset for the year ended 31 December 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 depreciation charge for the Right-of-Use (ROU) asset for the year ended 31 December 20X6?
Answer options:
A.
$101,088
B.
$102,088
C.
$120,000
D.
$100,000
How to approach this question
Calculate the initial ROU asset (Lease liability + initial direct costs). Divide this by the lease term to find the annual straight-line depreciation.
Full Answer
B.$102,088✓ Correct
Initial Lease Liability = $505,440.
Initial ROU Asset = $505,440 + $5,000 (initial direct costs) = $510,440.
Depreciation is charged straight-line over the 5-year lease term: $510,440 / 5 = $102,088.
Common mistakes
Forgetting to include the initial direct costs in the ROU asset before calculating depreciation.
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