Pdq Management Accounting Case
Autor: Sharon • March 12, 2018 • 1,534 Words (7 Pages) • 622 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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