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Dear Mike,
Please can you advise on following:
Why the profit from Sale and leasing back an Asset as a Finance Lease is not shown on Statement of Profit and Loss in the year of sale but taken as deferred income over the term of the lease? Please can you give the rationale behind it.All help is really appreciated.
Regards
PuneshIt was an asset in TNCA
After the finance lease is agreed, it becomes an asset again
So, in effect, it has never ceased being an asset and it has not been disposed of
OK?
Thanks Mike it does make sense.
I have another query, How is lease rental treated when preparing Sof PL. I was working on a Kaplan Question in which they reduced Cost of Sale by the Lease Rental payment amount. I thought, this is an expense as paid by the company so should reduce the profit.
Please help on this too.
Kind regards
PuneshSorry in continuation to my above question: I would like to mention that in the question it is mentioned that lease rental was paid on 31/05/X7 and was charged to Cost of Sale and we are preparing SOFP on 31/05/x7. Does that mean that it will not be recorded in the current year financial statements.
Please advise.
Kind regards
PuneshIn answer to your second question, I have one / a few of my own:
This payment on 31 May, 2007 … was this the first payment?
Are payments made in advance or in arrears?
Is this a finance lease or an operating lease?
It looks to me ( a guess) that it’s a finance lease that has been incorrectly treated as an operating lease … but I could so easily be wrong
Basically I need more information from you!
Good morning Mike,
As per your reply above:
1. The payment on 31 May 2007 was the first payment
2. Payment are made in arrears as the asset was acquired on 01 June 2006
3. This is a finance lease as the entity is responsible for the maintenance/ insurance of the assetPlease advise.
Kind regards
PuneshThanks for the additional information
I repeat, from my earlier post, “It looks to me ( a guess) that it’s a finance lease that has been incorrectly treated as an operating lease”
That’s why the payment has been deducted from cost of sales – it has been incorrectly treated as an operating lease
Good morning Mike,
This time I have a query about Financial Instruments and Amortised Costs. I understand that on the basis of accruals concept the interest we receive ie the difference between the money paid and money received is year split so that it can be shown on SPL. However, it is not the true money received e.g. If we buy 5% Bonds for $97000 with the maturity value of 1005960 after 3 years, the interest we have received is £8960 which is to be distributed. The effective rate of interest being 8%?
My questions is what is the significance of the effective rate of interest. I find it quite confusing because according to me we are getting 5000 pa and why this is not shown on SPL?
Apologise if I have not made myself clear.
Please advise.
Regards
Punesh
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