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On 1 January 20X6 Fellini Co hired a machine under a four year lease. A deposit of $700,000 was payable on
the commencement of the lease on 1 January 20X6. The present value of the future lease payments was
$1,871,100. A further 3 instalments of $700,000 are payable annually in advance. The interest rate implicit in
the lease is 6%.
What amount will appear under non-current liabilities in respect of this lease in the statement of financial
position of Fellini Co at 31 December 20X6? [Answers to nearest $’000]In this question, the payment is made in advance, and therefore the payment is deducted and then the interest is accrued. However this is not the case in the answer at the back. Is the book answer wrong?
The answer at the back says:
The final answer is $1,283,000 ($1,283,366 rounded)
PV of future cash flows is 1871100
Interest at 6% (6%x $1,871,100) is 112266
Balance of the lease liability at 31 Dec 20X6 is 1,983,366Current 700000
Non current 1,283,366
=1,983,366Hi,
The answer is correct but is confusing, plus it would help to say exactly when the future three payments happen. I suppose the key is that they are in the future, i.e. start next year.
The total lease liability is 2,571,100 (700,00 deposit + 1,871,100 PV of future lease payments). The deposit of 700,000 immediately reduces the liability to 1,871,100, to which we then accrue the 6% interest. The interest of 112,266 is then added to the 1,871,100 to give the closing liability of 1,983,366
To find the non-current element we look at the final payment of next year, which is the 700,000 being first of the 3 further installments, and the number immediately to the right of this is the NCL. In this instance it is the 1,283,366 (=1,983,366 – 700,000).
Hope that clears it up for you.
Thanks
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