- July 28, 2020 at 2:46 am #578434sarasiwParticipant
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?
With the approach I took to resolve this, the answer is B (28,802)?
If you could explain this, thank you.
- August 1, 2020 at 7:43 am #578890P2-D2Keymaster
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.
- August 1, 2020 at 12:57 pm #578911sarasiwParticipant
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)
- August 8, 2020 at 8:40 am #579618P2-D2Keymaster
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?
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