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I am using BPP’s study notes and study text and have come across two questions that are making it difficult for me ascertain whether a deposit paid is deducted from the present value of future lease payments BEFORE the interest is calculated.
A company leases an asset on 1 jan x1. The terms of the lease are to pay a non-refunable deposit of $575 followed by seven annual payments of $2000 payable in arrears. The PVFLP on 1 jan x1 is $10K. What is the interest charges in the P&L for the year ended 31st Dec x1.
Interest rate is 11%
10,000 x 11% = $1,100
on 1 Oct x4, Flash co acquired an item of plant under a 5 year lease agreement. The PVFLP was $25m. The agreement had an implicit finance cost of 10% per annum and required an immediate deposit of $2m and annual rentals of $6m to be paid on 30 Sept each year for 5 years.
What is the current liability for the leased plant in Flash co’s B/S at 30 sept x5?
23,000 x 10% = 2300
19300+1930 (10% int) – 6000 = 15230
Current liability = 19,300 – 15230 = 4070
In Question 1 the deposit has not been deducted and in question 2 the deposit has been deducted.
I think it’s due to ‘Non-refundable deposit’.If the question mentions it,we shouldn’t deduct it.