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Hello mike,
Assuming we are doing finance lease and payments are made in advance.
There is one advance payment immediately and 4 followup payments on year ends, what would be life of the lease?
4 years or 5 years? (For calculation of depreciation)Also for example if question asks ‘Show how company will account for lease in first year’.
Do we take split up into CL and LTL of Lease Liability balance at year end or at year start?
i have this small example that has me confused..
To reward a long-serving senior lecturer a college seeks to buy a specialist sports car, an Aston Martin, as a company car, taxed as a benefit-in-kind. Two advertisements appear in the local newspaper for second-hand Astons at $11,000. The lecturer visits the showroom nearest the company and after an AA inspection negotiates the price down to $10,425, on the understanding that the company (college) will pay $2,500 immediately on 1 January 2008, with 4 more instalments on the anniversary of signing the agreement. The implicit rate of interest is 10% per annum .
so is depreciaton 10425/5 or 10425/4 ?
and After payment of 2500 at year end, Liability came down to 6218, so do i take split up of that into CL and LTL or should i take split up of 7925 into CT and LTL? When showing extracts into First year Financial statements?In your example ( which college buys their lecturers Aston Martins? ) I would say the life of the lease was 5 years.
Depreciation would therefore be $10,425 / 5
The CL / LT split would be the capital balance outstanding at the end of the first year so that would be $10,425 – $2,500 = $7,925
There would in addition be a current liability of 10% x $10,425 representing interest accrued during the first year which is not due for payment until “tomorrow”
OK?
Ok i understand but Why 5 years? is it 4 years and 1 day thats why we count it as 5 years?
Mike, kindly shade more light on the number of years and again are we not supposed to do one additional year for us to come up with the Long tern liability and Short term liability? your guidance is always appreciated.
It’s 5 payments in advance. the first payment covers from “now” to next year. The second covers from next year for another twelve months.
5 payments covers five years
Yes, we calculate one more year after this year to find the long term capital amount outstanding and the difference between that figure and the “today” amount outstanding is the current liability
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