TOPIC: ACCOUNTING FOR LEASE

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Problem 8

At the beginning of current year, an entity sold an equipment with remaining life of 10 years and immediately leased it back for 4 years at the prevailing market rental.

Sale price at fair value6,000,000

Carrying amount of equipment 4,500,000

Annual rental payable at the end of each year800,000

Implicit interest rate10%

Present value of an ordinary annuity of 1 at 10% for four periods 3.17

Q1. What is the initial lease liability?

A.2,536,000

B.3,200,000

C.3,000,000

D.0

Q2. What is the cost of right of use asset?

A.1,902,000

B.2,598,000

C.2,536,000

D.0

Q3. What is the gain on right transferred?

A.866,000

B.634,000

C.750,000

D.0

Q4. What is the annual depreciation of the right use asset?

A.475,500

B.190,200

C.634,000

D.253,600