Question #2XYZ Inc. is getting ready move its factory from its exciting location to a new industrialfree trade zone specially created by the government for manufacturers. To avail itself ofthe preferential licensing offered by the local governmental authorities as a reward formoving in to the free trade zone and the savings in costs (since there are no duties ortaxes in the free trade zone), XYZ Inc. has to move in to the new location before the yearend & the current lease is non cancel-able and is for another two years from year-end.The obligation under the lease is the annual rent of Rs. 100,000.Required: Advise XYZ Inc. what amount, if any, it needs to provide at year-endtoward this lease obligation
Question
Question #2XYZ Inc. is getting ready move its factory from its exciting location to a new industrialfree trade zone specially created by the government for manufacturers. To avail itself ofthe preferential licensing offered by the local governmental authorities as a reward formoving in to the free trade zone and the savings in costs (since there are no duties ortaxes in the free trade zone), XYZ Inc. has to move in to the new location before the yearend & the current lease is non cancel-able and is for another two years from year-end.The obligation under the lease is the annual rent of Rs. 100,000.Required: Advise XYZ Inc. what amount, if any, it needs to provide at year-endtoward this lease obligation
Solution
XYZ Inc. needs to provide for the remaining lease obligation at the year-end. Since the lease is non-cancellable and is for another two years from year-end, the company is obligated to pay the annual rent of Rs. 100,000 for those two years. Therefore, the amount to be provided at year-end towards this lease obligation is Rs. 200,000 (Rs. 100,000 x 2 years). This provision should be made irrespective of the move to the new location as the lease agreement is legally binding and cannot be cancelled.
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