On 1st January 20x8, Needcash Ltd sold its factory to Investco Ltd for $45 milli
ID: 2342716 • Letter: O
Question
On 1st January 20x8, Needcash Ltd sold its factory to Investco Ltd for $45 million and
enters into a contract to lease it back over a 20-year period for an annual payment of
$3.5 million, payable at the end of each year. The implicit interest rate in the lease is
5% p.a. The transaction satisfies the requirements under FRS 115 Revenue from
contract with customers as a sale.
At the time of the sale, the fair value of the factory was established at $40 million. The
factory was originally purchased at $50 million and had accumulated depreciation of
$20 million.
In presenting your answers, please provide your workings and present your answers to
the nearest thousands of dollars. PV factor workings should be rounded to 5 decimal
places.
Required:
(i) Compute the value of the right-of-use asset showing clearly your workings
Compute any gain or loss transferred to the buyer showing clearly your
workings.
(iii) Illustrate the accounting of the above at the time of sale by preparing the
necessary journal entries in Needcash Ltd’s books. Journal narratives are not
required
Explanation / Answer
i) Calculation of Value of the right of use assets
Right of Use asset = Anuual payment * PVAF(rate,period)
= $ 3.5 million * PVAF(5%, 20)
= $ 3.5 million * 12.46221
= $ 43.61773 million i.e., 43,618 thousands $
Gain or loss = Sale price - Carrying amount
= $ 45 million - (Cost of factory - accumulated depreciation)
= $ 45 million - ($ 50 million - $ 20 million) = $ 45 million - $ 30 million
= $ 15 million i.e., 15000 thousdands $
ii) Journal Entry at the time of Sale of Factory
Journal entry for recording lease liability
Particulars Dr (Thousand $) Cr(Thousand $) Cash/Bank 45000 Accumulatede Deprection 20000 Assets 50000 Gain on sale of Fixed asset 15000Related Questions
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