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Hello Sir Mike,
Could u please explain the difference win amortization table of lease with regards to advance and arrears and also when lease and accounting year change
The date of installment payment determines the interest that is included within the installment. But that’s it! There’s not really any other difference (except that in some questions there is a payment right at the start of the contract and, in that case, there’s no interest included within that first payment)
I’m actually confused regarding the fact that rental payments are capital payment + interest , and we subtract capital payment only from original value, is that the same with advance as I know its the same with arrears
Yes, it’s exactly the same. The amount credited into the Obligations Account is JUST the capital element of the obligation. As time goes on between installments, interest is accruing on that capital amount outstanding. Now, when we next make an installment payment, some of that installment is utilised in paying off the interest that has accrued since the previous installment was paid
And that works the same whether it’s a question of installments in advance or in arrears
Better?
Yes much better but I was confused when I saw Lease Amortization Table in ACCA Technical Articles for advance calculation they had added interest amount calculated on outstanding balance and brought it forward for next year but my tutor has not never added interest portion , please clarify?
When calculating the amounts owing as at the year end (in the situation where the most recent installment payment did not coincide with the last day of the financial year) there will be an element of interest outstanding as well as the capital obligation brought forward following the most recent installment payment
The total amount outstanding at the current year end will therefore be that same obligation brought forward since the most recent installment payment PLUS interest accrued on that figure.
Within Current Liabilities there should be the value of obligation payments for the next twelve months PLUS the interest that has accrued during the period since that most recent installment payment
Is that better?
That is better I’m still quite confused about prepayment and arrears and if also lease and accounting date doesn’t coincide , if possible can u please recommend some lectures or notes where its solved
I can’t recommend anywhere where there is an example.
In a situation where accounting date and installment date don’t coincide, the question is doable if you approach it with a clear mind.
It may also assist you to draw a line diagram with key dates (start of lease, payment dates, year end date)
In that way you can see what has transpired as at the year end date and make your accrual accordingly
Let me know how you go on and, if you want, make up a question and I’ll try to answer it for you
Hi professor Mike,
I have a question related to a finance lease and I want to know the accounting treatment of the lease from Lessor’s point of view.
The case is as follow: a company has purchased some machines for EUR 800k, and these machines wants to lease to another company for 5 year period with annual payments 20000k.the first question is how should i record it in the accounting and the second question has to do with present value of minimun lease payments which interest rate I should use (in leasee I know that I can use borrowings interest rate) but in the Lessors prespektive I don’t know which rate to use (ie deposits interest rate or????)
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