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What will be recorded in Depay’s statement of cash flows under interest paid?
Information given:
Extract from P or L
Finance cost = 60,000Extract from SOFP
5% loan notes:
20×2 – 515,000
20×1 – 500,000Lease liability:
20×2 – 300,000
20×1 – 310,000Notes:
(i) 40,000 of the finance costs relate to the loan notes which are repayable at a premium, making the effective rate of interest 8%. The remaining interest relates to the lease liabilities.
(ii) Depay acquired 70,000 of new assets under lease agreements during the year. Depay makes annual payments under leases on 30 September each year.Answer: $45,000
Question: why is the interest paid for loan notes the cash flow 25,000 instead of finance cost 40,000? But the interest paid on lease is 20,000 (60,000-40,000)
Hi,
Of the 60,000 finance cost we are told that 40,000 relates to the loan notes, so 20,000 must be the interest on the lease.
If we take the interest that has been accrued on the lease then this will be the amount paid too given that we make payments at the end of the lease period. In making the payments at this point we are paying off the interest that has been accrued during the year first before we repay the capital balance. So the cash flow is 20,000.
For the loan notes then the interest accrued of 40,000 is added to the opening liability of 500 giving 540. If the closing liability is only 515 then the liability mush have been reduced by the cash paid. The difference of 25,000 is the cash flow that is then added to the 20,000 to give the 45,000 total.
Hope that clears it up.
Thanks
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