On January 1, Espinoza Moving and Storage leased a truck for a four-year period,

Question

On January 1, Espinoza Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,000 due on December 31 of each year, calculated by the lessor using a 5% discount rate. If Espinoza’s revenues exceed a specified amount during the lease term, Espinoza will pay an additional $4,000 lease payment at the end of the lease. Espinoza estimates a 60% probability of meeting the target revenue amount.

What amount should be added to the right-of-use asset and lease liability under the contingent rent agreement?

Explanation / Answer

According to the IFRS 16

The present value of probable amount to be payable shall be added to the right of use asset and contingent laibility. Calculated as follows:-

=Amount payable if Condition satisfied * probability *PVF@5%

=$4000 *60%* 0.822702475

= $1974.48594 or $1974

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