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Hindberg is a retail car dealer . On 1/4/2004, Hindberg sold a car to latterly on the following terms;
The seller price of the car was $25,300.Latterly paid $12,650 (half of the cost) on 1/04/2004 and would pay the remaining $12,650 on 31/3/2006 (2 years after the sale).Hindberg’s cost of capital is 10% per annum. What is the total amount which Hindberg should credit to profit or loss in respect of this transaction in the year ended 31/3/2005?
Solution
Discount of $12650 by 10% for one yr = $11500 and effective deferring Finance cost $1,150) .
Total amt credited to P/L is $24,150 ( 12,650+ 11,500).
I really don’t get why we should credit such a huge amt . I taught we are paying annually the finance cost which is just $1,150 that is for 2005 and pay both Finance cost and remaining value in 2006?
Defferred cons for 1yr (2005) will be 12650*1/1.1^1 = $11500
Finance cost 0.1* 11,500 = $1,150
This will be charged to P/Loss acct to increase our liability
Total amount will be 11,500 + 1,150 for 2005 as c/fLast yr B/f $12,650 – 1,150 paid already for 2005 remaining 11,500 plus charge final finance cost of 1150.
Pls explain to me becos I do not understand why kaplan added 11500 + 12,650.
Is it that each yr I will be paying 11,500 + 12,650 annually ? Or just the $1,150 annually only?
At the moment of seeking the car, Latterly owes the full amount so will be registered as a receivable to the value of $25,300 less the discounted value of the remaining instalment that will not become due until two years hence
But we shall only discount that $12,650 for one year because, by the end of the first year when we are preparing the first set of financial statements after the sale took place, ,there will be only one year remaining
Half the amount ($12,650) is paid immediately leaving as a receivable $12,650 discounted for 1 year
At the end of the first year, the only element of the sale that should not yet be recognised as revenue is that finance cost related to the second year
OK?
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