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  1. Profile photo of rajaasifahmed says

    Sir in reconciliation of PV ( Giedrius)

    5. £3000 (gross). Net £1712 but I divide £3000 by 1.10 by 6 times it gives me £1693 again different . That’s what you told us in example 1. Please advise

    • Profile photo of MikeLittle says

      Just one question before I agree with you – just confirm that the cost of capital is 10%

      If it is, then I must agree with you, I also have just calculated it to be 1,693

      I probably did it by mental arithmetic the first time (but I’ve just done it again in my head, so that’s no excuse)

      • Profile photo of rajaasifahmed says

        Thanks for prompt response. Sir can you please advise any trick to convert gross amount into net. As we can’t calculate all interest & instalment payment till end nil balance . As we just have to calculate till year end of year 2.

      • Profile photo of MikeLittle says

        You will NOT EVER be required to calculate the interest for more than “this year and the next”

        I need to think again about the 1,712 / 1,693 issue – I suppose it could just be rounding but that’s unusual – I try not to be guilty of rounding too much

  2. Profile photo of zee says

    the Lease interest calculation changes depending on the rental payment done in advance and rental payment done in arrears. How this will effect the interest calculation table?

    • Profile photo of MikeLittle says

      It doesn’t change the basic principles at all. What you should always have clearly in your mind is the dates the payments are made and how much capital has been outstanding for how many months

      Otherwise, it’s just the same! Capital brought forward since last installment paid, add on the interest accrued on that capital (pay GREAT attention to the dates / periods) pay the next installment (beware, it may be paid “tomorrow” in the next accounting year) and that will give you a capital amount outstanding to which you will apply the same principles ie add interest, deduct payment, add interest, deduct payment, add inte……

  3. avatar says

    on example 2 calculation for Giedrius why is it written deposit Jan 2004 $1152? I thought it is Jan 2009 as the question said that the deposit was 1 Jan 2009 $1152. why are we using the actuarial method in this example?

    • Profile photo of MikeLittle says

      Hi Sharly

      Where exactly does it say “deposit paid Jan 2004″?. The notes say 2009. The lecture may say 2004 but that’s because it was a recorded lecture from a previous (original) version.

      You need, mentally, to move the years in the lecture forward by 5.

      We are using the actuarial method because the rate of interest is given in the question

      OK?

  4. avatar says

    Hi all..does anyone know how the net figures came out of reconciliation of obligations under finance leases ..the gross is understood ..how was 2790,8793,1712 calculated…thank you for your help..Mike! Can you help?

    • Profile photo of MikeLittle says

      Yes, but I wish that you had posted this on the Ask the Tutor page!

      These figures represent the present day discounted value of the future instalments

      So, $3,000 discounted at the rate of 10% for 1 year is $2,790 (it’s actually $2,727)

      $3,000 discounted for 5 years at the rate of 10% gives us $1,712 (actually it’s $1,863 – that could also be incorrect – I’ve just arrived at the figure through mental arithmetic – I don’t have a calculator to hand)

      I trust that that would have been helpful back in June!

      • avatar says

        Excuse me Mike, does it mean, that figures 2790 and 1712 in course notes are incorrect? Because if we simply calculate 3000 by dividing on 1.1 or (1.1)^6 – the figures are different

      • Profile photo of MikeLittle says

        Hi Pavel – yes – if my most recent post calculations are correct, then the figures in the course notes are rounded badly. The figures in my recent post were done to a degree of accuracy not necessary in the exams – normally the examiner will expect you only to work to 2 decimal places – and that’s also in the rare event that there is a lease calculation question in the exam – that, itself, is highly unlikely

  5. avatar says

    Guys, the way I understand it, is that the question is asking us for figures that will appear in financial statements at the y/e 31/12/2009. In other words they are asking us what will be treated as CL (payable within next 12 months time) and what will be treated as NCL (paid after 12 months from the y/e 31/12/2009). Therefore we need figures at y/e 31/12/2010 to figure out what will be payable within next 12 months from y/e 31/12/2009 (CL) and what will be paid afterwards (NCL).
    Please correct me if I am wrong.

  6. avatar says

    Hi Mike,
    I have got a question in reference to Reconciliation of Obligations under Finance Leases with the present value of the minimum lease payments

    We know that from questions that the lease is for 7 years term. I cant get my head around why is it only 5 years is taken in to account. This is an extract from answers from lecture notes.

    Why aren’t we saying that over 5 years are 2 x 3000, hence 6000. Why is it only 1 lease payment shown in payable more than 5 years.

    Payable within 1 year 3,000
    Payable more than 1 year, less than 5 years 12,000
    Payable more than 5 years 3,000

    I understand you are busy man but i will really appreciate Mike if you can please help.

    • avatar says

      Sir, please ignore above. I was under the impression that this was from the reconciliation was from beginning of the time (start of lease) which is not the case. This will be dependent on the how many payment period has been lapsed.

      Thanks.

  7. avatar says

    Dear Mr. Mike,
    Could you tell me, please, for the task with Giedruola, how have you calculated “Financial lease interest not yet accrued” for “Reconciliation of Obligations…with minimum lease payments”?

    Thank you in advance for answering my question.

    Olga

  8. avatar says

    Thank you for a great lecture Mike. Could you please explain how the current liabilities and long term liability is calculated ? i am a bit confused about it, how come the log term liability is the remainder amount at the end of year 2 and current the difference between year 2 and year 1. what is the logic as we are preparing the financial statement as at the end of year 1 as per question? Thank you in advance

    • Profile photo of MikeLittle says

      That’s an easy one! We know the total liability (say 30,000) at the end of the year and that total amount is payable over the next (say) 5 years. But we need to know how much is payable within twelve months (current) and how much is payable in periods more than twelve months hence (deferred)

      If I calculate the amount outstanding at the end of NEXT year (say 23,000), then that figure represents the element of the current year’s total obligation (30,000) which will still be outstanding twelve months hence.

      Thus we can see that, of that 30,000, 23,000 will not be paid in the current year and is therefore deferred whereas our liability will fall by 7,000 (30,000 – 23,000) over the next twelve months and that must represent the current element of the 30,000

      OK?

      • avatar says

        @ MikeLittle:
        I got the logic behind calculating Current Liability. However can you please explain why we take the figure as at the end of the next year as NCL?

        Thanks

    • Profile photo of MikeLittle says

      but how much interest RELATES to the accounting period? The payment on 1 July paid off the interest that had accrued for the period from 1 January up to 30 June. Interest then accrues from the period from 1 July up to 31 December – but that interest is not paid until “tomorrow” when we pay the next instalment on 1 January next year.

      Does that clear it up?

  9. avatar says

    Sir,
    Thank you for the excellent lecture. However, I suggest that you help us to solve part two of the question for a simple reason. The logic used to determine the non current liability and the current liability seems to be different if the rentals are paid in advance. I have not been able to decode this logic. I came across it in Kaplan.

    Thank you in advance!

    • Profile photo of Mahoysam says

      If you check the notes, you will find the correct year at the back . Maybe the lecture is recorded when the question had a different year or something, but the answers in the notes have the correct year anyways.

      • Profile photo of MikeLittle says

        @bajprincess, You’re absolutely correct. We need to subdivide the obligation to the lessor into current and long term and the easiest way is to progress the calculations up to the end of the accounting year following the year we are asked to consider

  10. avatar says

    In example two (Giedris) the estimated used life of the asset was nine (9) years however seven (7) years was used to calculate the depreciation. It was noted that seven (7) years was not mentioned in the question at any point. Why was the depreciation worked at seven (7) years.

    • Profile photo of MikeLittle says

      @jehanhasan, You could really do with a “picture” of the “obligations account” where you show the capital amount outstanding and show the dates when the capital amount is then changed by the interest calculated on that capital amount. Then show the payment of the installment and the date and that should then leave you with the capital amount outstanding for the next period until we again calculate the interest ….. and so on

  11. avatar says

    sir in example 1 the payment is in arears and in example two it is clearly written that the rental payment is on 1st january and 1 july but in your answer , you did write the payment of 1500 on 30 june and 31 december so my question is, if the payment date does n,t effect the calculation then why it is mentioned clearly in question ? kindly explain about it.
    kind regards

    • Profile photo of MikeLittle says

      @jehanhasan, It DOES affect the calculation – the payment date determines the capital element outstanding at any point in time and it’s the capital element upon which the interest is calculated until the next installment date

  12. avatar says

    dears Sir, Am I correct to think this question video was mixed on editing. At around 3 mins 5 secs the working figures appear to be suddenly totally different from the figures about 15 seconds before..i’m confused. Please view the video from 2min 45 sec to 3min 15 secs

    • Profile photo of MikeLittle says

      @fzinyemba, Hi, no, it’s fine. The screen shots you refer to are the situation / schedule after two payments ( the earlier screen ) and then 2 instalments after that. If you look upwards from the second screen, you’ll find 15,295 higher up.

      It’s just that the second screen doesn’t show the 15,295 from the first screen

      Is that clear? I know what I’m trying to say but it seems to have come out a bit jumbled!

  13. avatar says

    Dear Sir

    Why have you started with 2004? The notes state that Giedris aquired asset on 1 January 2009 this I believe is the same for example 1
    Should it start with 2009 the year when the asset was aquired?

    Many thanks

  14. avatar says

    Sir, I don’t understand the answer to Giedruola that you said we do it ourselves especially extract of the SoFP where its written in the answer as follows:

    TNCA 13714
    C.L 1712
    LTL 11583
    Interest
    not yet
    accrued 665

    My question is why is it the same as Gieoris and that figure of 665, its confusing please if u can help.

    Zamina.

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