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Hi Tutor, I have a question relating to Investment.
Restoration cost is discounted at present value but cost of changes have not been discounted to present value.Respectively, the question shows that they have both incurred prior to on 1 october 2015.
Why i only discounted restoration cost?
COuld you pleaase explain it to me?
Thanks in advance.Fundo entered into a 20 year operating lease for a property on 1 October 2002 which has a remaining life of 8 years at 1 october 2015.The rental pay is $2.3 million per annum. Prior to 1 october 2015, Fundo obtained permission from the owner of the property to make some internal changes to property so that it can be used for a new manufacturing process which Fundo is undertaking.The cost of these changes was $7 million and the were completed.(time taken to complete the changes can be taken as being negligible).A condition of being granted permission was that Fundo would have to restore the property to its original condition before handing back the property at the end of lease.The estimated restoration cost on 1 october 2015, discounted at 8% per annum to its present value is $15 million.
prepare extracts from sftp of fundo year ended 30 september?
under p/l
operating lease rental-2300
depreciation charge(7000+5000:8)-1500
finance cost(5000*8)-400Under sftp
fixed asset
leased property(7000+5000)-12000
Ad(1500)
10500
non-current liabilities
5000+400 5400Are you sure that the present value of restoration is $15 million? Should it not be $5,000?
“The estimated restoration cost on 1 october 2015, discounted at 8% per annum to its present value is $15 million”
“a 20 year operating lease for a property on 1 October 2002”
From 1 October, 2002 to 30 September, 2015 is 13 years so there is only 7 years life left in the lease. So depreciation of the changes should be over 7 years and not 8 … unless this is another typing error?
“…but cost of changes have not been discounted to present value”
You tell me that the cost of changes was $7 million and they were completed. What’s the present value today of $7 million spent today?
How much money do you have in your pocket / purse today? What’s the value of that money today? Why would we be discounting that $7 million?
OK?
Sorry mistankenly i wrote 15 million it is 5 million.I am sorry for this mistake
It’s a bit awkward to try to answer questions when the question itself is wrong!
What about the 7 year / 8 year issue?
I am sending it,if you wanna see question it has been taken from becker f7 question revision bank page number 95.
Fundo entered into a 20 year operating lease for a property on 1 October 2002 which has a remaining life of 8 years at 1 october 2015.The rental pay is $2.3 million per annum. Prior to 1 october 2015, Fundo obtained permission from the owner of the property to make some internal changes to property so that it can be used for a new manufacturing process which Fundo is undertaking.The cost of these changes was $7 million and they were completed on 1 october 2015.(time taken to complete the changes can be taken as being negligible).A condition of being granted permission was that Fundo would have to restore the property to its original condition before handing back the property at the end of lease.The estimated restoration cost on 1 october 2015, discounted at 8% per annum to its present value is $5 million.
prepare extracts from sftp of fundo year ended 30 september?
under p/l
operating lease rental-2300
depreciation charge(7000+5000:8)-1500
finance cost(5000*8)-400Under sftp
fixed asset
leased property(7000+5000)-12000
Ad(1500)
10500
non-current liabilities
5000+400 5400
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