Question

Shamrock Fashion Company enters into a lease arrangement with Highpoint Leasing for 5 years. Shamrock agrees to pay 5% of its net sales as a variable lease payment. Shamrock does not pay any fixed payments. Shamrock is a highly successful company that has achieved over $1,950,000 in net sales over the last 7 years. Both Shamrock and Highpoint forecast that net sales will be a much greater amount than $1,950,000 in subsequent years. As a result, it is highly certain that Shamrock will make payments of at least $97,500 ($1,950,000 × 5%) each year.

What is the lease payment amount Shamrock should use to record its right-of-use asset?

Answer 1

An s wherever in a lease agreement which contains variable rease payments then such payments are not Considered in determing the value of right of use of asset As per above lease agreement Shamrock Fashion company will pay only the variable lease payments on basis of ret sales. At the date of commencement of lease arrangement the present value of such payments are not known te lessee Thus variable lease amount is not considered sight to use asset while determining value of Company should decord Therefore shamrock sigh-to-use asset Fashion at $0