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June 09 Q2-Pricewell, how to understand and deal with the two items in trial balance:
1) Finance lease payment (paid on 31 Mar 09 6m
2) Obligation under fianance lease at 1 Apr 08 15.6mI cant connect t above with condition i- leased plant. What’s the relation of them. Thanks.
Hi
Finance lease payment would be made up of following
1) Interest element
2)capital element.
finance lease payment would be part of SOCIHowever Obligation under finance lease is provided to you on 1 apr 2008. as such you need to deduct capital part of finance lease payment from it and show as net figure in SOFP.
Hope its helps
Regards
RajThanks. Can someone explain my question more details with question Pricewell. Thanks.
1)Finance lease payment of 6m is the yearly payment. This will be deducted from the total finance lease liability.
2)Obligation under finance lease at 1 April 08 is the opening balance of finance lease liability.leased plant will be shown as an asset in the SFP $10,000. ie, cost $20,000 – accum depn $5,000 – depn for the yr 5000 = $10,000.
Depn is 25% straight-line = 25%*$20,000 = $5,000.Now, the finance lease liability
opening balance given 15.6m.
interest of 8% to be charged.
lease payment 6m.(in $000)
closing balance for liability = opening $15,600 + interest(8%*$15,600) – payment $6,000 = $10,848
This is total liability. This should be split as non-current & current liabilities. Non-current liability is the closing liability as at next year end. Total liability of current yr less non-current liability gives current liability.
Liability as at next yr end = $10,848 + (8%*$10,848) – $6,000 = $5,716. This is non-current liability to be shown in current yr SFP.
Current liab = $10,848 – $5,716 = $5,132Hope it helps
Najiya, my mentor:) I m crying now, waiting for you a long long time. Thanks. Reading your comment carefully now. So happy:)
I am also an f7 student for June 2012.
sorry for late reply, was busy.u r welcome!
wrote down on my paper, perfect. really helped a lot!!!
One more doubt-this way is a little different from 8% loan notes. We just put C.V. as closing bal=opening bal+int.-paid for NCL. NO CL.
What causes the difference? I cant think out.
8% loan notes – we are paying only interest each year.
here, it is not the case.
if we look at the current liability in this qn, we show it as 5,132; though we will be paying 6,000 during the next year. that is, actually, the current liabilty is 6,000. but, we cannot recognise interest in accounts unless it is accrued. so, we record only 5,132, ie, 6000-(8%*10,848…next yr interest)
Now, looking at 8% loan notes, current liabilty will be only interest and that cannot be recognised.one more point.
in this qn, payment was in arrears, i.e, at the end of the yr.
another case is payment in advance, ie, at the beginning of the yr. in this case, closing bal will b calculated as opening- payment+ interest. And non-current liability will be calculated as opening of next yr – payment.in a finance lease qn,
you have to indentify,
interest amt, installment amt,current liability, non current liability, depreciation amt.interest amt is charged as finance cost in IS.
installment amt is the payment we make.this installment amt inclusive of interest amt.
in other words,
installment amt(lease payment)=capital element + interest amt.there are 2 cases.
case 1> payment made in arrears.
case 2>payment made in advance.now,
case 1.
since installment amt is paid at year end.
also, installment amt is same for all year. in this example, it is 6000.current liability = 6000- interest charged in next year.
current liability implies the amount we have to pay in 12 months. so in this case, it is supposed to be 6000. (this installment amt was determined before hand)but we take 6000- 868(interest of next year)=5132.in other words, march 20×8, we know already that in march 20×9, we have to pay installment amt,i.e, 6000. than why dont we take the installment amt(6000) as current liability?i had this doubt , why they had to deduct this 868(interest amt of next year).
this is classic information.
we cannot recognize this interest amt of coming year as current liability.
this is bcoz, it is a contingent liability. why that is a contingent liability.
bcoz there is no present obligation on past event.
in other words, interest amt of future year we cannot recognize this year as a liability as it is contingent liability.once CL is determined, u can find NCL
finance lease c/f=CL +NCL.
10,848=5,132+NCL
NCL=5716the above calculation is same for case 1 and case 2.
case 2.
payment made in advance.here , the installment amt itself is the current liability.
in this qn, if the finance lease was making payment in advance then the current liability would be 6000 itself.that means in our qn, instead of paying it in march , they would pay in april(begining of accounting year), now, 6000 includes interest amt and that was for past year(ie april 20×7 to march 20×8). so we can include it as current liability.
but in our qn, we making payment in march. so current liability is 6000- future interest amt.(868).
i tried to explain my best.
you pls refer study text and take examples of this 2 case.still if you have doubts. write it here. so myself or najiya or some else can clear it.
Thanks for complementary, Vipin. So in case 2 same qn.
1) Finance cost is (15,600-6,000)X8%=768
IS
2) CL is 6,000? Total Liab is 15,600-6,000+768=10,368?, so NCL is 4,368Pls correct if wrong steps. Thanks a lot!
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