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During the yr ended 30/9/2004 Hyper entered into two lease transactions. On 1/10/2003, Hyper made a payment of $90,000 being the first of five five equal annual payments under the lease term of plant. The lease has an implicit interest rate of 10% and the present value of the total lease payment on 1/10/2003 was $340,000 .
On 1/1/2004 , Hyper made a payment of 18,000 for a one year lease of item of equipment.
What amount in total would be charged to Hyper’s statement of profit or loss for the year ended 30/9/2004 in respect of the above transactions?
Solutions
Dep for the yr 340,000/5yr = $68,000
Finance cost (340,000 – 90,000) * 10%= $25000
Rental of equipment $13,500 ( 18,000* 9/12)
Total charge to SOPL = $106,500.
Pls, do we have to charge depreciation on this lease asset and what about if it’s an operating lease ? Fine agree we have to charge based on the long lease term which is a kind of Finance lease.
The finance costs confuse me a little , if the amount is 340,000 and implicit interest rate is 10% … this is charge to the SOPL to increase the libality ( provision) on the leasor account
Double entry :
debit lease asset
Credit lessor accountI was thinking the Finance cost = 10% of 340,000= $34,000 and then deduct the $90,000 annual payment.
Also, the rental of equipment $13,500 is it for the 9 months lease liability ( PV) ? I mean is it the initial lease liability maybe included is the costs associated with the lease?
If it was for 9 months, this means monthly payment was supposed to be 1500 .
Meaning a finance cost total was 4,500 because total was 18,000.This is really different from financial instrument where we charge the effective interest first on the amount lets say on d basis of amortized cost. Annual Finance charged on FV less T. costs.
The couple rate is charged on the principal amount let’s the issue of $600,000 4% debenture. This is the equal annual deduction .
But on this question depreciation was charged on the total lease payments , Finance cost was charged after deducting the annual equal lease charged .
My point will not be better to charge Finance cost on amount b/f before deducting the supposed annual payment ?
“Pls, do we have to charge depreciation on this lease asset …”
Yes, because it’s effectively our asset – we have the risks and rewards of ownership so why would we not depreciate it?
“… and what about if it’s an operating lease ?”
Here we don’t have the risks and rewards – it’s not our asset, we’re just renting it. So no depreciation
“I was thinking the Finance cost = 10% of 340,000= $34,000 and then deduct the $90,000 annual payment.”
If you borrow $340,000 and immediately repay $90,000, how much have you borrowed?
“Also, the rental of equipment $13,500 is it for the 9 months lease liability ( PV) ? I mean is it the initial lease liability maybe included is the costs associated with the lease?”
I don’t really understand what you’re asking here – this is a rental payment. The full rental is $18,000 but we have only rented the asset for 9 months in the current financial year ended 30 September, 2005. So, following the matching principle, we shall set off the expenses of the period against the revenues of that same period. We have had the use of the asset for only 9 months so it has contributed towards our business activities for only 9 months. Therefore include only 9 months’ worth of rental payment
“If it was for 9 months, this means monthly payment was supposed to be 1500 .
Meaning a finance cost total was 4,500 because total was 18,000.”You need to read the question carefully – it’s a one year rental but that rental year started only three months in to our current financial year
“This is really different from financial instrument”
Yes, because it isn’t a financial instrument question!
“My point will not be better to charge Finance cost on amount b/f before deducting the supposed annual payment ?”
We did – see my opening response to these posts of yours
OK?
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