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- This topic has 7 replies, 2 voices, and was last updated 7 years ago by MikeLittle.

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- January 19, 2017 at 8:39 am #368279
Hi sir,

I have one typical question about F7, which I learnt before, but I forgot how to solve it, can you help me with that? I just wonder why deferred interest is 1868 , why equal payment is 12967.

“Johnson Ltd is entering into a contract to sell boat products to Fisher Ltd for $50 000. The agreement allows Fisher Ltd to pay for these goods by equal instalments, the first instalment being required on delivery and the remainder to be paid every 6 months for the next 2 years. The boat products are delivered to Fisher Ltd on 1 January 2017. Johnson Ltd determined that an appropriate discount rate for interest on this transaction is 5% per annum.

Required:

Prepare the journal entries for the year ended 31 December 2017. (Show all workings)”January 19, 2017 at 8:43 am #368280The solution is

1 Jan 2017

Dr receivable 51868

Cr. Revenue. 50000

Cr. Deferred interest 1868

Dr Cash 12967

Cr receivable. 129671 Jul 2017

Dr Cash 12967

Cr receivable. 1296731 Dec 2017

Dr deferred interest 926

Cr interest income 926Thanks in advance.

January 20, 2017 at 8:44 am #368514Miley, where’s this question from? I don’t recognise the name

January 20, 2017 at 8:47 am #368515Hi sir,

It is just my course assignment, but I cannot remember equal payment, this kind of solution when I learnt F7.January 20, 2017 at 9:30 am #368522Right – first things first – this is NOT a deferred tax question as the heading suggests

It’s more a leasing question or a purchase by deferred payment question

I have tried to tackle the question with logic (sadly lacking, unfortunately) and I’ve tried to solve it with the use of ‘x’s algebraically, but that got exceedingly complicated

Eventually I turned to my Excel spreadsheet, set up the appropriate table, and tried a 6 monthly payment of $12,600

This left me with an ‘extra’ amount of $1,522.83 at the end of the period, so I changed the payment to $12,700

This left an ‘extra’ amount of $1,107.58

A change of $100 payment led to a fall of $1,522.83 – $1,107.58 = a fall of $415,25 and I needed to make the figure fall by a further $1,107.58

Applying the principles of extrapolation, this indicated that the payment needed to increase by 2.667261 * $100 so I then tried $12,700 + $266.73 = $12,966.73 and, lo and behold, there was no amount left over after the fourth payment

Start with $50,000, deduct $12,966.73, add on interest at 5% for 6 months, deduct $12,966.73, add on interest at 5% for 6 months, deduct $12,966.73, add on interest at 5% for 6 months, deduct $12,966.73 and there’s your answer

The interest calculations bring figures of $925.83, $624.81 and $316.26 and that represents a total of $1,866.90

OK?

January 20, 2017 at 9:35 am #368528Thank you very much.

January 20, 2017 at 9:37 am #368529You’re welcome

January 20, 2017 at 11:44 am #368559Miley – I sent the question to John Moffat (F2, F5, F9, P4) on Opentuition and here’s part of his response:

“you get the equal annual amount by dividing the 50,000 by the annuity factor for the number of periods at the interest rate per period.

So if the first payment is in 1 years time, then you would divide by the annuity factor for 4 periods at the interest rate per period.

In fact, since the first payment is immediate, you would add 1 to the annuity factor, and then divide by the total.The interest rate per period (i.e. six months) is strictly (the square root of 1.05) -1 = 0.0247 (or 2.47%) although I am sure they would accept 2.5%.”

Better?

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