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On 1 April 2009, Crosswire took out a finance lease for some new plant. The fair value of the plant was $10million. The lease agreement provided for an intial payment on 1 April 2009 of $2.4million followed by eight six-monthly payments of $1.2million commencing 30 September 2009. – The question is for the year end 30 sept. 2009.
The company has no other finance lease.
Non-current liability for finance lease obligation at 30.9.09 – $5040000.
Current liability for finance lease obligation at 30.9.09 – $1760000
Finance lease charges – $400000So, how do we record items above in the statement of cash flows. In my opinion, i would record it this way…
first, $2.4mil will be recorded under headings “Cash flows from investing activities”.
then. $0.8mil will be recorded under headings “Cash flows from financing activities” – because although repayment is $1.2mil, but $400000 is recorded as finance cost earlier under “cash flows from operating activities”.
please correct me if i;m wrong, as i simply couldn’t agree with the suggested answer from December 2009 question 3. – Crosswire . thank you
Hi – these are my thoughts! Under “Cash flows from operating activities” we have the ADD BACKS of depreciation and interest. The depreciation figure you haven’t given me but the interest figure is 400,000 (subject to there being no other finance charges)
Still under “Cash flows from operating activities” we have the amount of (400,000) interest paid
Under “Cash flows from investing activities” there will be ………. no entries!
Under “Cash flows from financing activities” there will be an entry called “Payments to finance lease creditors” and the amount will be (3,200,000) (that’s 2,400,000 + 800,000)
OK?
now i got really messed up. haahhaa, now i have a different question.
in December 2009, only 800, 000 is recorded as cash flows under financing activities, although payment is 1.2mil, 400,000 is for the interest which as you said, under operating activities,
Now in all other years, why do we take the full payment under cash flows under financing activities, even though the question gives us the finance cost for the lease. i mean why we don’t seperate the lease payment between the principal and interest.
i hope you get what i mean,
like for example, In December 2009, there’s figure given of 400,000 of finance costs of the finance lease interest.
it is given in the question that the company paid 1.2mil for the finance lease that year, so we seperate 400,000(related to interest) under operating acitivites and 800,000(the principal payment) under financing activities.now, take for example June 2013, there’s also a figure given of 250,000 of finance costs related to the finance lease.
However, the question doesn’t give what’s the amount the Co. pays to the provider of the lease, which we need to worked out.
In $’000
Dr. Finance Lease c/d – current $750
Dr. Finance lease c/d – non-current $1200
Dr. Cash payment(balancing figure) $1050
Cr. Finance lease b/f – current $600
Cr. Finance lease b/f – non-current $900
Cr. New lease $1500therefore, for the year, the company paid $1050,000 for the finance lease, which made up of $250,000 interest and $800,000 principal.
so in the suggested answer, why do we include the total $1050,000 in cash flows under financing instead of $800000, since $250,000 already be recorded under operating activities. (referring to what the examiners has done in december 2009). Also in my opinion, as the examiners has deducted $250,000 under operating activities, he shouldn’t deduct once again from financing activities, since it would appear as if there’s double-counting.
Maybe it’s because the Finance Lease Creditor account shows ONLY the capital amount due to the finance lease lessor. Those figures you have given me relate only to that capital amount.
The interest element of the lease payments has presumably been correctly recorded as an expense
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