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Hi Chris,
I have a confusion in figuring out when the lease payment is made if it is in advance or arrears in the question below. The only way I could recognize this is to calculate the PV of lease payments, assuming that lease rentals are made in arrears, and that figure comes to $45,000. If I take the other approach (in advance), the PV won’t tally. Can you please help me to resolve this?
“Z entered into a lease agreement on 1 November 20×2 paying 10,975 per annum, commencing on 31 October 20×3. The PV of the lease payments was $ 45,000 and the interest rate implicit in the lease was 7%.
What’s the amount to be shown within the Non-current liabilities at 31 October 20×3?
A) 26,200
B) 28,802
C) 37,175
D) 36,407With the approach I took to resolve this, the answer is B (28,802)?
If you could explain this, thank you.
Hi,
If the lease agreement starts on 1 November 20X2 and the first payment is 31 October 20X3 then the payments are in arrears as the first payment is one year after the start of the lease agreement.
Once you have determined this then you need to work out the opening lease liability and set up the lease payable table, ensuring you set it up correctly for payments made in arrears.
Have a go and see how you get on. I can then let you know where you might be going wrong. I’m reluctant to just give you the answer as it doesn’t help with your learning.
Thanks
Hi,
Below is the lease payable table for this question, and the answer is 28,802.
BF INT OS PMT CF
1 45,000.00 3,150.00 48,150.00 (10,975.00) 37,175.00
2 37,175.00 2,602.25 39,777.25 (10,975.00) 28,802.25
3 28,802.25 2,016.16 30,818.41 (10,975.00) 19,843.41
4 19,843.41 1,389.04 21,232.45 (10,975.00) 10,257.45
5 10,257.45 718.02 10,975.00 (10,975.00)Thanks
OK, so you’ve copied across the answer. Which bit do you not understand? Is it the strucutre of the table? Is it how we calculate the non-current liability?
Thanks
Hi Chris,
Could you clarify a question I have regarding question 1 of the CIMA F1 Chapter 11 Test
The question gives the fair price of the asset as $380 000, I see that this amount was used as the “right of use” value to calculate the depreciation. May fair price be used as the “right of use” and the lease liability value, value even if the PV differs? (in this case by about $1000).
Thank you
Hi Paul,
Yes, it can be used as the difference here will be down to rounding when calculating the present value.
Thanks
hi, i would like to know how to calculate present value of a lease when given future value , PMT , implicit rate and (n). Which formula do i use?
thanks
Hi,
You would use the discount factor formula to find the discount factor for each year of the lease. The discount factor for year one is then applied to the payment in year one to work out its present value. The same is then done for the remaining years up to the end of the lease. The total of the present values will give the lease liability at the start of the lease.
Thanks
Hi, I have found this forum/website very helpful so I hope you will be able to help me with question below:
It is my first one question where I am asked to exercise the option. I have calculated depreciation for 4 years and 5… it is open question so I can’t check if it match to any of the suggested answers:(
On 01 January 20X2, TFM enters into a contract to lease some equipment from KVC for a lease term of four years, with annual lease payments of T$60,000 payable in arrears. The lease term can be extended by one year for the same payment of T$60,000, also payable in arrears, and it is reasonably certain that TFM will exercise this option.
The present value of lease payments not paid at 01 January 20X2 (including the T$60,000 payable if TFM extends the lease) is T$233,400. If TFM does not extend the lease, the present value at 01 January 20X2 is T$194,400. The equipment has a useful life of six years. Ownership of the equipment does not transfer to TFM at the end of the lease term. TFM’s accounting policy is to depreciate equipment on a straight-line basis with a nil residual value.
Calculate the depreciation charge on the right-of-use asset that TFM should recognise in its statement of profit or loss for the year ended 31 December 20X2.
Consider whether TFM is likely to exercise the option to extend the lease and whether the right-of-use asset should be depreciated over the lease term or the useful life of the equipment.
Thank you
Hi,
Welcome to the forum.
I doubt that you would see a question as such in he exam so don’t get too concerned with the answer.
Given that it is reasonably certain (per the question) that the lease would be extended, the lease term is extended by an additional year to 5 years. This lease term is still shorter than the useful life of six years, so we would depreciate over 5 years as the standard requires us to use the shorter of the two.
Thanks
Hello,
When reading an exam question how do I know when to use the present value table and when to use the cumulative present value table?
Thanks
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