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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?
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.
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%.