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Hi Mike…..
if cash price of Asset is $20000Deposit $1150
Instalments $4000 p.a payable for seven years in arrearsimplicit rate is 11%
Asset useful life is four year.what will be the present value of minimum lease payment and what amount will be captalized as an asset and on which amount the interest will be charged…
Without actually working out the pv of the minimum lease payments, I assume that the cash price of $20,000 must be somewhere close to the pv.
So capitalise $20,000. Deduct $1,150 leaving $18,850 and that will be the base for the first interest calculation (11% x 18,850 = 2,074)
Ok?
Thanks for reply but when pv of lease payment is less than the cash price what will do?
It depends by how much less. If pv is less than 90% of the cash price, then it’s an operating lease! If it’s between 90% and 100% of the cash price, capitalise at the lower of the two amounts.
Ok?
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