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In Q Fino(12/07)
We calculate interest on the outstanding balance right?but in this qs they have consistently taken the same amount of interest every 6 months instead of calculating it on the remaining balance?
Hmm – I don’t know the question, but it doesn’t sound like they have allocated interest in a way which reflects the amounts outstanding
In the question you refer to, the interest is 1 years interest but split into 6months interest at the end of one period, and 6 months which falls into the next period. Both interest payment calculations fall between the 2 repayment payments so are based on the same outstanding balance. The following year would see 2 more 6 monthly interest calculations based on the new balance of the original cost minus 2 repayments.
In other words, the 2 6monthly interest payments are actually just 1 annual interest charge of £25,000 but because the repayments are due mid way through the financial year, it is split between 2 periods. They have calculated it as 2 separate 6 month payments but they could just have easily have calculated a full years interest and split it into 2.
On the assumption that the finance lease interest is based on the brought forward capital amount outstanding at the start of the year, the treatment is acceptable. Yes, ok, we could compute interest on interest but that’s not even in the P2 syllabus. Don’t make complications where the exam is complicated enough already!
🙂
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