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Hi sir, for September 2016 exam , question 22.
We are asked for the finance cost. I saw the workings in the answer key. But I don’t understand how they derive to $2million.
My understanding:
The cash price is $55000 x 5 years = $ 275 000
Deposit is $20 000
Therefore initial value = $275 000 – $20 000 = $255 000This is from the question … “The fair value of the machine is $220,000”
A deposit is paid immediately so the amount “borrowed” is $200,000
Is that any clearer?
I think there is an error in the answer key. Instead of 200 000, it is stated as 2,000,000.
The treatment varies based on the type of lease.
For a sale and operating leaseback , the entire profit or loss on disposal will be recorded.
For a sale and finance leaseback, the profit or loss will be spread over the lease term.
Am i right ?
So for agreement three, how do we distinguish whether that’s a sale and operating leaseback or a sale and finance leaseback ?
If you’d checked the mathematics you would have seen that your assumption was correct!
“So for agreement three, how do we distinguish whether that’s a sale and operating leaseback or a sale and finance leaseback ?”
The clue here is in the phrase “and Blocks Co will lease the machine back for five years, the remainder of its useful life”
Okay I got it. The total useful life of the asset is 6 years. And the lease term is 5 years. Since the lease term covers most of the UL of the asset, it will be classified as a ” Sale and finance leaseback”
Therefore, the Profit or loss on disposal will be deferred over the lease term of 5 years , giving $24 000 right ?
Not quite
From the question we have “…will lease the machine back for five years, the remainder of its useful life…”
You say “Since the lease term covers most of the UL of the asset …”
In fact, the 6 year life of the machine is not an issue here. What is important is that the lease term is for “substantially the whole of the remaining useful life” rather than “most of the useful life” and in the situation of agreement 3 in the question, the lease term is for 100% of the remaining useful life
Incidentally, 83.33% (5 years out of a total of 6 years) would not qualify as “substantially the whole of …”
OK?
Hi sir for question 24 I do not understand how the lease rental expense figure is calculated. I think that there should be no lease rental expense since agreement ii) says no payment to be made in year one. may you please explain?
Just because there is nothing PAID in any particular year, that doesn’t necessarily mean that there is no expense related to that year
Calculate the total lease rental expense over the life of the agreement and then divide by the number of years in that agreement
That will give you the appropriate expense for each year of the agreement
OK?
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