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hi sir,
This right-of-use lease relates to a new piece of machinery. The fair value of the machine is $220,000. The agreement requires Blocks Co to pay a deposit of $20,000 on 1 January 20X5 followed by five equal annual instalments of $55,000, starting on 31 December 20X5. The implicit rate of interest is 11.65%.
For agreement one, what is the finance cost charged to profit or loss for the year ended 31 December 20X6?
Answer:19607
Hi sir, im confused, the payment made is in arrear( mentioned starting on 31 December 20X5) so I assume its arrears. My answer: finance cost= 220000×11.65%=25630..pls correct me sir.
Thank you.
Hi,
If the payment is in arrears then you are correct to apply the interest to the outstanding capital balance for the year. Here, I’m not convinced that your $220,000 starting figure is correct. Check what it should be and then you will get the right answer when applying the 11.65%.
Thanks
I am doing this question and i do not understand why the $20000 was deducted from the $220000 to get the opening balance? can you explain why i thought because it was an immediate deposit payment it was to be added to the cost. Unless if it formed part f the $220000. kindly explain.
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