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  1. Avatar of Mahoysam says

    Hi Mr Mike – I understand what you are doing in the lecture, yet when I tried to solve the first question in the mini questions, I was not able to figure out how did they arrive in the answer (pilot paper) that 55,000 is the outstanding non current obligation – Here is the question:

    On 1 April 2010 Kala entered into a lease for an item of plant which had an estimated life of five years. The lease period is also five years with annual rentals of $22 million payable in advance from 1 April 2010. The plant is expected to have a nil residual value at the end of its life. If purchased this plant would have a cost of $92 million and be depreciated on a straight-line basis. The lessor includes a finance
    cost of 10% per annum when calculating annual rentals. (Note: you are not required to calculate the present value of the minimum lease payments.)

    Why in the answer the way they calculated as follows: the non current obligation is simply 77000 (outstanding obligation at the end of the year) less 22,000 (which is the next installment). This is not the same thing you are doing here, or is it? I am really confused, could you please show me how to arrive at the current and non current element of the outstanding obligation the same way you did in the lecture?

    Many thanks!

    Maha

    • Avatar of MikeLittle says

      If the cash price is 92 and the first installment of 22 is entirely capital (because it’s paid in advance and therefore includes no interest) then the capital outstanding after that deposit is paid is 70. Add 10% interest to get to the end of the first year and the year end outstanding amount is 77 and we pay 22 “tomorrow”?
      The amount of CAPITAL outstanding at the end of the first year is 70. Move forward to tomorrow and we pay 22. That 22 settles to 7 accrued interest + 15 of the capital. So the capital now outstanding after that second payment of 22 is now 55 ie 70 capital outstanding less the capital element of the second payment of 22.

      As at the end of the first year, the CAPITAL OUTSTANDING payable more than 12 months hence is therefore 55

      Is that clear?

      If not, post again

      • Avatar of Mahoysam says

        Thank you Mr Mike for this clarification, I get it but it is confusing me this way, I want to solve it the same way you did it in the lecture, but when I do, I don’t get the same answer, here is my answer, can you tell me where did I go wrong?

        Fv 92,000
        (22,000) >> Acts as a deposit
        =
        70,000 >> FV at 1.4.2010
        7000
        =
        77,000 (outstanding amount at 31.3.2011)
        (22,000)
        =
        55,000
        5,500
        =
        60,500 (outstanding amount at 31.3,2012)

        As per the above calculation, the current liab. should be 16,500 (77,000-60,500), which means that the long term liability is 60,500 (16,500-77,000).

        This is how I would solve it according to the method in the lecture which I am pretty much comfortable with, but I am not sure what is wrong in my answer!!!

        Thank you

        Maha

      • Avatar of MikeLittle says

        The long term liability should be JUST the capital element. In the figures quoted above, the capital element is 55.000. At the previous year end, the capital element outstanding is 70,000. So, of that 70, 55,000 is payable >12 months hence and is therefore long term debt and the remaining 15,000 is a current liability.

        Of course, there is a further current liability and that is the 7,000 interest which is also payable “tomorrow” within the 22,000 payment

        Is that better?

      • Avatar of Mahoysam says

        Mr. Little, I FINALLY get my mistake! :D – For current liability calculation, I should be getting the difference between the outstanding capital element amount, not the full outstanding amount at the end of each year which includes the interest!

        This is what you have been doing in the lecture and I understood it, I am not sure why I got confused over this example specifically! Maybe because the payment is made in advance. Anyways, I appreciate the time you gave explaining this to me. Thank you very much! I hope our efforts will pay off and I will pass!

        Maha

  2. Avatar of anisa786 says

    HI

    Please explain the calculation used for disclosure for reconciling Minimum Lease payments to Fair Value on the gross basis.
    Initially we said that there are 7 instalments to be paid which is R24 000. But the calculation presented in the lecture is R21 000.

    Am I missing something

    Thanks!

    • Avatar of MikeLittle says

      @nigs001, Have you actually watched the video?

      The fair value is 17,500. A deposit is paid of 460. So the amount “borrowed” is 17,040, This is outstanding for one complete year and interest is accruing at 10%. So, at the end of the first year Sergijus owes capital of 17,040 plus interest of 1,704 ( a total of 18,744 ) And then he pays 3,500 and reduces the amount owing to 18,744 – 3,500 which equals ????

      OK?

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