On January 1, Espinoza Moving and Storage leased a truck for a four-year period,
ID: 2515712 • Letter: O
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