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I followed the example explained in the lecture and the interest was calculated on the outstanding balance so Do I calculate interest after deducting payments or before? can you give an insight of the logic behind it.
Hi,
it depends on whetehr the payment is made in advance (start of the lease period) or in arrears (end of the lease period).
If it is in advance then the payment is deducted form the outstanding balance before the interest is accrued, as the payment reduces the outstanding balance immediately at the start of the year and interest is then only accrued on what is outstanding.
If it is in arrears then the interest is charged first on the outstanding balance before the payment is then deducted at the end of the year.
The key is to use the lease payable table that we’ve used in the notes/lectures, making sure you lay it out correctly depending on whether the payments are in advance or in arrears.
Thanks
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