Question

Mustafa constructions and Real estate LLC is involved in the construction and sale of apartment flats. The company is involved in two types of economic activity. Firstly, The company rents out one of its own commercial apartments worth OMR140,000 to a training institute on the lease agreement. The training institute pays equal monthly rentals of OMR 4,500 to Mustafa constructions and Real estate LLC. There is no other role by the Mustafa constructions and Real estate LLC other than lease deal. On 15 March 2018, Mustafa constructions and Real estate LLC sold three flats from its newly constructed building project to different individual customers the total worth of these flats was OMR 78,000. All the flats in this newly constructed building are held for sale.

Secondly, Mustafa Real Estate LLC has purchased two long trailer trucks worth OMR 21,000 each. These long truck trailers are capable of cross country transportation. The company has leased these two trucks to a Muscat based transporting company. The payments to these rental are based on the distance traveled with few additional clauses. On an average, the Muscat based transport company pays OMR1,800 per month as a rental.

Required: As an accounting student, explain the accounting treatment for the above scenario considering international accounting standards.

Answer 1

Accounting for First Economic activity:

1. Rental income of OMR 4,500 shall be taken as rent income.

Sale of flats are taken into revenue when risk & reward transfer. Further, Flats are taken as Inventory and no depreciation will be provided on Flats.

2. Truck should be capitalized and depreciation will be provided on them. When truck give on lease then rental income is taken to revenue.

As Lease received against truck is operating lease as "payments to these rental are based on the distance traveled with few additional clauses"