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On 1st April 2017 company A entered into agreement for the right to use two specified items of equipment for 4 years from company B. The two items of equipment have a fair value of $0.34m . company B is responsible for the repairs and maintenance and must provide a temporary replacement if the equipment needs repairing or servicing. Company a keeps the equipment on their premises and allocates work to the machines as part of their normal operation. There is no right to purchase the equipment at the end of agreement. The equipment has an estimated life of 5 years
The terms of agreement include 4 equal installment of $0.1m payable in advance of 1st April each year. After the initial payment of $0.1m the present value of the remaining installment is $0.24mWhat is the value of non current lease liability at 30 September 2017
And what answer have you arrived at?
It looks to me like the inherent / implicit interest rate is 12% (but I could be wrong)
Yes interest rate is 12% but I don’t understand from where did they get this 12%
Were you given this interest rate or are you simply agreeing with my calculation?
Where did I get the 12%? I used trial and error – I started with an assumed 10% , then tried 15% and eventually settled on 12%
But now we have the figure of 12%, are you now able to calculate the current and non-current lease liabilities?
Sir in the answer calculation is like this
Liability at 1 April 2017. 240000
Interest (240000*12%*6/12) 14400
Balance on 30 sept 2017. 254400
Interest (240000*12%*6/12). 14400
Payment. -100000
Capital balance sept 2018. 168800I do not understand why they added twice interest and they deducted 100000 after adding interest in question it is advance and about 12% I don’t kno how they got
“why they added twice interest”
The first interest was to find the amount of the obligation outstanding as at the year end (the agreement was signed 6 months into the current year) so the first calculation was to find the interest charge for that first year even though it was not payable until another 6 months later
The second interest calculation was to find the amount outstanding just immediately before the $100,000 instalment because, of that $100,000 only some of it repaid the capital. The rest was paying the accrued interest since the obligation was started
So, of that $100,000, we know already that the interest element was $28,800 ($14,400 + $14,400) so the capital that was repaid in that $100,000 instalment was only $71,200 leaving a capital amount outstanding at 30 September, 2017 of $168,800
“they deducted 100000 after adding interest in question it is advance”
The penultimate sentence in your original post read:
“After the initial payment of $0.1m the present value of the remaining installment is $0.24m”
So the amount “borrowed” had a present value of $2,400,000
Add on interest
Deduct instalment
Add on interest
Deduct instalment
It’s a shade more complicated because the obligation started part way through the year so we have to do an interest calculation to get to the accounting year end and then a further interest calculation to get to the day before the instalment is due
Is that any better for you?
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