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I need help with the following question
Q.On I April 2007,Fino entered into agreement to lease the plant from manufacturer. The lease required 4 annual payments in advance of $100000 each commencing on 1 April 2007. Implicit interest rate is 10%.The plant would have 4 year useful life.The finance director believes it to be operating lease.
What is the amout to be shown under non current liabilities at 30 Sep 2007 in respect of this plant?
A 175000
B 262500
C 250000
D 100000I make it to be answer A
What does the solution say it is?
And are you sure that you’ve given me FULL information?
This is a tricky one to work out with just the information given!
The question doesn’t give us the cash price / fair value of the asset, so we need to work backwards up the table … and it’s made more complicated because the year end is 30 September whereas the instalment payments are on 1 April
You’ll need a table of figures 21 lines long
In the space for the 21st line, write “-”
In line 20, write (100.00) (that’s the fourth instalment, paid 1 April 2010)
In line 19, write 100.00
Line 18, write 4.55 (that’s half a year of 100.00 * .10 / 1.10, interest 6 months to April ’10)
Line 17, write 95.45
Line 16, write 4.55 (that’s the other half year of 100.00 * .10 / 1.10, int 6 ms to Sept ’09)
Line 15, write 90.90 (that’s the capital outstanding at 30 September, 2009)
Line 14, write (100.00) (that’s the third instalment, paid 1 April, 2009)
Line 13, write 190.90
Line 12, write 8.67 (that’s half a year of 190.90 * .10 / 1.10, interest 6 months to April ’09)
Line 11, write 182.23
Line 10, write 8.67 (that’s the other half year of 190.90 * .10 / 1.10, int 6 ms to Sept ’08)
Line 9, write 173.56 (that’s the capital outstanding at 30 September, 2008)
Line 8, write (100.00) (that’s the second instalment, paid 1 April, 2008)
Line 7, write 273.56
Line 6, write 12.43 (that’s half a year of 273.56 * .10 / 1.10, interest 6 months to April ’08)
Line 5, write 261.13
Line 4, write 12.43 (that’s the other half year of 273.56 * .10 / 1.10, int 6 ms to Sept ’07)
Line 3, write 248.70 (that’s the capital outstanding at 30 September, 2007)
Line 2, write (100.00) (that’s the first instalment, paid 1 April, 2007)
Line 1, write 348.70 (that’s the cash price / fair value of the asset)Now we can see the capital amount outstanding as at 30 September, 2007 (248.70) and at 30 September, 2008 (173.56)
The question asks “What is the amout to be shown under non current liabilities at 30 Sep 2007”
At 30 September, 2007 capital outstanding in total is 248.70 of which 173.56 is payable more than 12 months into the future so that’s the non-current liability … rounded to $175,000!
I bet you wish that you hadn’t asked!!!
OK?
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