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An example of finance lease
Let say I bought a car or a house which has total payement of £ 60,000I payed a downpayement of £ 20,000 and then will pay £5000 plus interest on a monthly basis.
An example of operating lease
Let say I brought a car on rent for a week. £900 is payed per day.MY question is, an example which is mentioned above of finance and operating lease, is it correct or not
If it is wrong then please give me example so that I can have a clear concept about it.The asset that you claim is the subject of a finance lease is not for ‘substantially the whole’ of that asset’s life … so it’s not a finance lease
Acquiring an asset with a five year estimated useful life on a five year lease – an item of plant – would be a typical example of a finance lease that you would meet in an F7 exam
Ok?
Q3) a business has taken out a new lease on a factory building and surrounding land. The fair value of the building is $5M and the fair value of the land is $3M. The lease is for 20 years, which is the expected life of the factory with annual payements in arrears of $500,000. The business has a cost of capital of 8%. The annuity factor for $1 receivable every year for 20 years is 9.818.
Solution :
The lease payements will be spilt in line with the fair values of the land and the building.
$187500 (500000×3/8) will be treated as lease payement for the land and $312500 will be treated as payement on a finance lease for the building.
The payement for the building will be treated as a finance lease because it is for the expected useful life of the building. The present value of the minimum lease payements in respect of the land amounts to $1.87m
( 187500×9.818). This is not substantially all of the fair value of the land so the lease of land will be treated as an operating lease.Q3) fair value of building is $5M and minimum lease payements is $1150546.875 ($312500 ×3/8)
= answer × 9.818) the minimum lease payements is not even the 90% of the fair value then how come building could it be treated as a finance lease.Why are you multiplying $312,500 by 3/8?
That $312,500 relates entirely to the building and $187,500 relates to the land
Oppps sorry my mistake
But why building would be treated as finance lease as the minimum lease payement is not even the 90% of it’s fair value.I’m trusting your accuracy in copying out the question and I’m also trusting your figure for the 20 year annuity …
… and, given those caveats, I would agree that the arrangement does not appear to qualify as a finance lease
Ok?
Yeah yeah i have rechecked it. It is from bpp text book example no 1.5
Thank you sirOn 1 April 20×7 fino increased the operation capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of $350000. On the recommendation of the finance director fino entered into an agreement to lease the plant from the manufacturer. The lease required four annual payements in advance of $100000 each commencing on 1 april 2007. The rate of interest implicit in the lease is 10% . The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director believes the lease to be an operating lease.
Q1) on 1 April 20×7 fino also took out an operating lease on another piece of equipment. The lease runs for four years and payements of $1000 per month are payable in arrears. As an incentive to enter into the lease, fino received the first quarter rent free.
What about should be recognised as payements under operating leases for the period 20×7?
At the back of the kit the answer is $5625
But I think it should be $2182 as first quarter is rent free therefore $1000 per month ×48months
48000-3000 = $45000
$45000÷48months = 937.5 ×3=$ 2182At the back of the kit
It has done like this 937.5×6=$5625
My question is why they have multiplied by 6 as the first quarter is rent free.You need to tell me the accounting reference date! I assume that the financial statements are for the year to 30 September 20X7!!!!
The benefit of that free three months needs to be spread over the life of the contract.
So calculate amount payable over the entire contract ($45,000) and divide by the length of time that the contract will run (4 years)
Then time apportion for this first period (6 months)
So $45,000 / 4 = $11,250
$11,250 / 2 = $5,625
The IAS requires us to spread the benefit of incentives over the entire period of the contract
Ok?
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