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In the suggested answers, for the finance costs on 8% loan notes , it was given as
1600 (800 trial balance + 800 suspense account)
why is this so? i got $800 because that’s the finance cost on the loan note. Why do we have to add an additional 800? Could you explain ?
In the trial balance there’s only $800 – this represents the first 6 months’ interest of 8% on $20,000
But the notes have been in issue for the full year so we should be charging a full year’s interest of $1,600 (8% of $20,000)
In fact, $1,600 has been paid but the accountant was having a hard day on the day the payment was made and forgot where to debit the $800 so instead he debited it to the suspense account
OK?
How do you know the loan notes were in issue for 1 full year ? Is it because it is stated that 1/4 of it was redeemed at par on 31 march 2015 ?
We can see that 6 months’ interest has been paid (that’s the $800 in the trial balance) and note ii in the questions says “and six months’ outstanding loan interest was paid”
Well, if 6 months’ worth has been paid and properly recorded and 6 months’ worth has been put into suspense account, that gives me a full year’s worth of interest
OK?
How do i deal with the transaction below ? I have never came across lease premiums before. And also i understand for finance lease, the rental payments whether in advance or arrears does affect the calculation. How about for operating lease? Does it affect too ?
Given on trial bal: Operating lease payments $2000
Clarion renewed an operating lease on a property on 1 april 2014. The operating lease payments represent an annual payment (in advance) of $1m and a lease premium of $1m. The lease is for 4 years and operating lease expenses should be included in cost of sales.
A lease premium is an amount paid by the lessee to the lessor in order to persuade the lessor to lease that property to the lessee
It’s an additional amount over and above the 4 years lease payments of $1,000 per annum
The IAS says that such a premium should be spread over the life of the lease so, in Clarion’s case, that premium will be expensed evenly over the four year lease period
The lease premium prepayment is calculated as $1000 / lease term 4yrs = 250 right ?
Why for the unamortised lease premium we got to take to $1000 – 250 – 250current asset = 500 . Why do we have to minus 250 twice ?
Because, of the remaining $750 that has not been amortised as at the end of the first year, $250 will be allocated to the next 12 months (so it’s current) and the remaining $500 will be allocated to periods beyond 12 months (so they’re deferred)
OK?
Ok. For the statement of cash flow, under the fiancing activity , why the
Repayment of finance lease = 2300 + (1500- 570)
= (3230)And not finance lease (NCL) 3747 + finance lease(CL) 1023 = 4770 ?
What is it that makes you think that the combined total of finance lease long term obligation plus finance lease current obligation should equate to the cash paid to the finance lease creditor?
If these figures are in NCL and CL, how can they have been PAID?
Dear sir please help me understand this note. after seeing the solution i freaked out and in can not understand it properly.
(iii) Property, plant and equipment:
Included in property, plant and equipment are two major items of plant acquired on 1 April 2014:
Item 1 had a cash cost $14 million, however, the plant will cause environmental damage which will have to be rectified when it is dismantled at the end of its five year life. The present value (discounting at 8%) on 1 April 2014 of the rectification is $4 million. The environmental provision has been correctly accounted for, however, no finance cost has yet been charged on the provision.
Item 2 was plant acquired with a fair value of $8 million under a five-year finance lease. This required an initial deposit of $2•3 million and annual payments of $1•5 million on 31 March each year. The finance lease obligation in the trial balance above represents the fair value of the plant less both the deposit and the first annual payment. The lease has an implicit interest rate of 10% and the asset has been correctly capitalised in plant and equipment.
No depreciation has yet been charged on plant and equipment which should be charged to cost of sales on a straight-line basis over a five-year life (including leased plant). No plant is more than four years old.
Ok, but you need to tell me which part you do not understand
have you watched the lecture on finance leases and the lecture on provisions and contingencies?
In addition the free course notes adequately cover both these areas
Finally, why not start a new thread instead of latching on to a thread that is 18 months old and concerns loan note interest accruals?
Don’t reply on this thread – start a new one please
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