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Sir,
Can you please explain why in the calculation of NCL and CL values as at 1.1.X4 and 30.9.X3 are used?
When we say amount due within one year and after one year – do we say within one year of start of the lease or the start of the year? In the question below, I think that is confusing me – accounting year starts from 1 April however lease starts from 1 Jan. What is different in calculation when the lease year and accounting year are not the same?
Thank you 🙂
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Question:
Bowtock has leased an item of plant under the following terms:
Commencement of the lease was 1 January 20X2
Term of lease 5 years
Annual payments in advance $12,000
Cash price and fair value of the asset – $52,000 at 1 January 20X2 – equivalent to the present value of the minimum
lease payments.
Implicit interest rate within the lease (as supplied by the lessor) 8% per annum (to be apportioned on a time basis
where relevant).
The company’s depreciation policy for this type of plant is 20% per annum on cost (apportioned on a time basis
where relevant).
Required
Prepare extracts of the statement of profit or loss and statement of financial position for Bowtock for the year to
30 September 20X3 for the above lease. (5 marks)Answer:
Workings:
Presentation of the lease liability
$
Total balance 30 September 20X3 (W3) 33,072
Capital amount due within 12 months (33,072 – 21,696) 11,376
Capital amount due after 12 months 21,6963 Movement on the lease liability
$
1 January 20X2: Fair value of lease and asset 52,000
First payment 1.1.X2 (12,000)
Balance 1.1 X2 40,000
Interest on $40,000 at 8% for 9 months 2,400
Balance 30 September 20X2 42,400
Interest on $40,000 at 8% for 3 months 800
Second payment 1.1.X3 (12,000)
Balance 1.1.X3 31,200
Interest on $31,200 at 8% for 9 months 1,872
Balance 30 September 20X3 33,072
Interest due to 1.1.X4 ($31,200 × 8% for 3 months) 624
Third payment 1.1X4 (12,000)
21,696Hi – there are clearly 2 key dates in the question.
The first is the date of the instalment payments (1 January) and the second is the accounting year end (30 September)
The answer (correctly) has calculated the interest for the 9 month period up to the year end (this amount will be shown in the statement of profit or loss as a finance expense) and, in addition, calculated the capital outstanding at that date ($40,000) as well as the capital outstanding one year later on 30 September ($31,200)
$31,200 is therefore a long-term liability and $8,800 a current liability.
1 January has to be used in the calculations because that’s the date when the instalment is paid and therefroe tha date when the capital amount outstanding is reduced by the capital element of the instalment
Does that help?
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