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Dear Sir,
First i must say your lectures were great i understand the topic now. However i was going through my Kaplan Text (1 Jan 2013 to August 2014) and came across a question where i am not sure if they have an error in the answer or i missed something. I was hoping you can help.Shaeen Ltd entered into an agreement to lease an item of plant with a fair value of $700,000 on 1 October 20X8. The lease required four annual payments of $200,000 each, commencing on 1 October 20X8. The plant has a useful economic life of four years and is to be scrapped at the end of this period. Shaeen is responsible for maintaining and insuring the asset. The implicit interest within the lease is 10%.
Required:
Prepare extracts of the financial statements in respect of the leased asset for the year ended 31 March 20X9.
Kaplan Answer has the following:
TNCA – (525,000) – Not clear on this i got (612,500)
NCL – (350,000) – Not clear on this i got (525,500)
CL – (25,000) – Accrued Interest – i am ok this.
CL – (150,000) – Lease Obligations (525-350-25) – not to clear on thisSir,
I found a technical article on leases and fully understand where the figures for the obligations were derived from. It also appears that the amount the text have for TNCA is a typo since they have (700,000 – 87,500 = 525,000) which looks impossible.
Without the benefit of a calculator, and siting in an airport waiting area …..
….it looks to me that depreciation should be half a year at the rate of 175,000 per annum. So depreciation should be half of 175,000 = 87,500. Book value should therefore be 700,000 – 87,500 = 612,500
Finance lease interest is 700,000 – the first instalment of 200,000 = 500,000
500,000 at 10% for half a year is 50,000 / 2 = 25,000
So there’s a current liability of 25,000 finance lease interest which will be paid in 6 months’ time
Just before the next instalment is paid, there is 500,000 + 50,000 ( a full year’s interest ) outstanding and then we pay 200,000. So capital repayable within 12 months is 200,000 – the 50,000 interest which has accrued up to that date = 150,000
As at 31 March, the total liability is 500,000 capital + 25,000 accrued interest. Of that amount, 150,000 capital will be repaid in the second instalment so the capital amount payable more than 12 months hence is 350,000 and 150,000 is payable within 12 months and is the current capital liability and 25,000 is also a current liability
Hope that’s clear – it seems that both Kaplan AND you have made different mistakes – I can’t see how you have arrived at a non-current liability of 525,500!
But what about the interest (350k*10%/2=17500) on 350000 for the period 1/10/X9 to 31 /03/x9 .This should also be included in current liability …
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