Leases- Capitalise asset at FV or PV of minimum lease payment?

Wwill9y ago

Hi Mike, This is the question: I am pretty sure there is an error somewere... am I missing something? JJ enters into a four year finance lease on an item of plant. The contract starts on 1 January 20X4 with the first payment of £200,000 being made on that date. The final payment is on 1 January 20X8. The fair value of the plant is $885,160. The interest rate implicit in the lease is 6.5% and JJ's reporting date is 31 December. Complete the following balance carried forward for 31st of dec x4. Solution 31st Dec x4 BFWD- 800,000 Less payment (200,000) total= 600,000 then * interest rate - 6.5% =39,000 the solution seems to suggest the BFWD is the FV figure of 885,160. how is this so when it should be the lowest of the payments (200,000*4) and the fv? Am I missing silly here?

MikeLittleTutor9y ago#1

This looks to me like 5 payments of $200,000 1 January 2004 1 January 2005 1 January 2006 1 January 2007 1 January 2008 When in doubt, use your fingers! To coin a phrase, let your fingers do the counting

Wwill9y ago#2

oo wow. yes you are right. Such small things.. can cause issues in an exam. Its always things to do with dates and time apportionment with f7!!! I am worried ;-( thanks Mike

MikeLittleTutor9y ago#3

I think I would be worried anyway ... what on Earth is the poor lessee doing leasing an asset for 4 years and then having to pay $200,000 on the day after the lease finishes? Crazy!

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