Question

Metcalf signs a three-year lease for an asset on January 1,20x1, which calls for annual payments of $2,000 at the beginning of each year. The implicit rate is 10% and this rate is known by the lease. The asset has a sales value of $8,000, a 5-year life and a residual value of zero at that time. The amount of ROU Asset amortization for the year ended December 31,20x1 under (1) IFRS and (2)GAAP is

Answer 1

Here Life of Asset is 5 years and lease periof is 3 years (60% of Life)

As per IFRs there is no diffrence between opering lease and finacial lease but as per GAAP a it must determine whether it is operating or financing.

So as per IFRS accounting will be done as Finance lease.

and, as per GAAP accounting done as a operting lease (lease period is less than 75% of asset lefe)

As per IFRS, we will first calculate ROU asset

Year	Lease payment	Discounting Factor @ 10%	Net present Value
Year 20X1	2,000.00	1.00000	2,000.00
Year 20X2	2,000.00	0.90909	1,818.18
Year 20X3	2,000.00	0.82645	1,652.89
Total			5,471.07

Amortisation will be = 5471.07 / 3 = $1,823.69

Further interest will be charged to income statement in year 20X1 is $347.11 calculated as under

Year	ROU Asset	Lease payment	Remaining	Interest
Year 20X1	5,471.07	2,000.00	3,471.07	347.11
Year 20X2	3,818.18	2,000.00	1,818.18	181.82
Year 20X3	2,000.00	2,000.00	-	-

As per GAAP,

As per GAAP amount of $2,000.00 is directly charged to Income statement as lease expense. Asset not capitalised so there is no amortisation.