Page 419 - SBR Integrated Workbook STUDENT S18-J19

Answers

Example 4

Reassessing the lease liability

Year ended 30 April 20X3

In the prior year, the right-of-use asset would have been recognised at $7
million ($5m + $2m). The depreciation charge in the prior year would have
been $1.75 million ($7m/4 years), and the carrying amount of the asset at the
end of the prior year was, therefore, $5.25 million.

The lease liability would have been recorded at $5 million. Interest of $0.5
million ($5m × 10%) would have been charged to profit or loss. As such, the
liability at 30 April 20X3 was $5.5 million ($5m + $0.5m).

1 May 20X3

Based on inflation for the last 12 months, the lease payments now due each
year are $2.1 million ($2m × 105%). The revised liability is calculated as
follows:
Cash flows Present value
$m Disc. $m
1/5/20X3 2.1 1 2.1
1/5/20X4 2.1 1/1.10 1 1.91
1/5/20X5 2.1 1/1.10 2 1.74
–––––
Revised liability 5.75
–––––
The lease liability must be increased from $5.5 million to $5.75 million. The
entry required is:

Dr Right-of-use asset $0.25m

Cr Lease liability $0.25m

After this adjustment, the right-of-use asset is held at $5.5 million
($5.25m + $0.25m).

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