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Pdq Management Accounting Case

Autor:   •  March 12, 2018  •  1,534 Words (7 Pages)  •  8 Views

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To assess the affect Option 2 will have on PDQ’s financial statements, we again must classify the lease to determine its accounting treatment under IFRS by applying the 3 criteria:

- Transfer of ownership at the end of 10 years

- Covers a major portion of the useful life (in our case, the entire useful life)

- PV of MLP is substantially the fair value (in our case, 96%)

*Again, with the assumption that this lease requires payments in advance*

MLP:

11,000 X 400 x (1+PVAF (9%,9))

= $4.4 million x 6.9952

= 30,778,880

In this case, the MLP represents approximately 96% of the fair value, therefore this is a financing lease as it transfers all risks and rewards to PDQ, the term length of the lease accounts the entire useful life of the truck and the present value of the minimum lease payments for a 10-year lease paid in advance would be $30,778,880.

To determine the journal entries needed to properly account for this lease and thus determine its true effect on PDQ’s financial statements, we must determine the implicit rate of this lease and prepare an amortization schedule. We will prepare this schedule using PDQ’s additional borrowing rate as the implicit rate used by the lessor is not stated.

Period

Lease payment Jan 1

Interest for year @ 9%

Reduction in principal

Principal after interest

0

9%

$ 76,948

1

$ 11,000

$ 5,935

$ 5,065

$ 71,883

2

$ 11,000

$ 5,479

$ 5,521

$ 66,362

3

$ 11,000

$ 4,983

$ 6,017

$ 60,345

4

$ 11,000

$ 4,441

$ 6,559

$ 53,786

5

$ 11,000

$ 3,851

$ 7,149

$ 46,637

6

$ 11,000

$ 3,207

$ 7,793

$ 38,844

7

$ 11,000

$ 2,506

$ 8,494

$ 30,350

8

$ 11,000

$ 1,742

$ 9,258

$ 21,092

9

$ 11,000

$ 908

$ 10,092

$ 11,000

10

$ 11,000

$ 0

$ 11,000

$ 0

Total

$ 76,948

Given a book value of 76,948 per truck at the 9% rate, we can also create a depreciation schedule to see the full effect this lease will have on PDQ’s financial statements.

Period

Depreciation expense (DB)

Asset Value

0

20%

$ 76,948

1

$ 15,390

$ 61,558

2

$ 12,312

$ 49,247

3

$ 9,849

$ 39,397

4

$ 7,879

$ 31,518

5

$ 6,304

$ 25,214

6

$ 5,043

$ 20,171

7

$ 4,034

$ 16,137

8

$ 3,227

$ 12,910

9

$ 2,582

$ 10,328

10

$ 2,066

$ 8,262

The journal entries required for PDQ to make each year per vehicle would be as follows (assuming PDQ makes the lease payments in cash):

Jan. 1, 2016

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