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Hi,
I have the following questions on leases:
1) in first video you showe example of gross and net amounts after instalment was done in amount 12,000 you said that less interest not accrued. Could you please explain more detailed when interest must be accrued, because I though that company once take a lease have to accruel interests.
2) There is also in note the sentence that ” only obligation recognised is the capital element”. What do you mean under capital element?
Here is also extraction from Kaplan book:
Could you please briefly expalin in common words each sentence. For some sentences I wrote notes how i understand them, maybe wright or maybe wrong. Just to be sure that I am understand in the right way.• The lease transfers ownership of the asset to the lessee by the end
of the lease term (thus hire-purchase transactions qualify)• The lessee has the option to buy the asset at a price expected to be
lower than fair value at the time the option is exercised-here I dont’t understad what it menas under “option is exercised”• The lease term is for the major part of the economic life of the asset
even if title is not transferred?• At the beginning of the lease, the present value of the minimum
lease payments (MLPs) is approximately equal to the fair value of
the asset.•The leased assets are of a specialised nature so that only the
lessee can use them without major modification?• If the lease gives the lessee the right to cancel the lease, the
lessor’s losses associated with the cancellation are borne by the
lessee-it means that if for example equipment that was taken by me in case of cancelation the lease agreement costs for return of the asset will be carried by me?• Gains or losses from fluctuations in fair value are borne by the
lessee- does it mean that for example if there will be raise in Fair value that i will just show that increase in my statement?• The lessee has the ability to continue the lease for a secondary
period at a rent below the market rent?Thanks a lot for your help in previous questions and for your patience!!!!!!
Leyla
This is altogether too much, sorry
It’s not reasonable to ask me 12 questions like this particularly where I believe that a careful reading of the notes and watching the video lectures will sort out most of them
Let me suggest two separate ways of going forward!
1 You watch the videos again and reread the notes. Then, where you still may have one or two problems, you come back to me with those.
Or 2 you write your questions together with your understanding of the expressions and I shall answer yes or no and correct you where I believe you may not fully understand
Let’s try that and see if it works
“1) in first video you showe example of gross and net amounts after instalment was done in amount 12,000 you said that less interest not accrued. Could you please explain more detailed when interest must be accrued, because I though that company once take a lease have to accruel interests.”
The interest that relates to periods beyond the current period under review does not satisfy the Framework definition of a liability. It is not an obligation, yet. In theory, the lessee could cancel the lease or could pay the lessor the capital element outstanding and thus incur no further interest charges.
So we only accrue interest as time goes by and NOT as at the start of the lease agreement
“2) There is also in note the sentence that ” only obligation recognised is the capital element”. What do you mean under capital element?”
This follows on from the previous point! At any point in time the only amount due to the lessor is the capital element of the lease together with any interest accrued sine the most recent instalment payment
For the purposes of a statement of financial position, only the capital element will be shown under the caption “Finance lease creditors” in both the sections “Current liabilities” and “Non-current liabilities”
The interest that has accrued since the most recent instalment payment will be shown as “Accrued expenses”
I’m not surely expected to explain Kaplan’s notes! If Kaplan is not capable of explaining technical matters in a non-technical way is it really up to me to rectify that weakness?
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