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Leases

Example 1

Leased asset

On 1 April 20X7, Sima entered into an agreement to lease an item of
equipment. The lease required four annual payments in advance of $215,000
each commencing on 1 April 20X7. The equipment has a useful life of four
years and will be scrapped at the end of the lease period. The present value
of the total lease payments is $750,000 and the interest rate implicit in the
lease is 10%.
How will this be reflected within the financial statements of Sima for the
year ended 31 March 20X8?

Solution

Extract from Statement of Profit or Loss for year ended 31 March 20X8

$
Depreciation ($750,000/4) (187,500)

Finance cost (W1) (53,500)

Extract from Statement of Financial Position 31 March 20X8
$
Non-current assets

Property, plant and equipment ($750,000 – $187,500) 562,500

Non-current liabilities
Lease payable (W1) 373,500

Current liabilities

Lease payable (W1) 215,000

The finance cost and lease liabilities are best calculated using a lease liability
table, starting with the initial value, deducting payments and charging interest
as below.

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