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My attempt at the working the financial expense for Dec 2012 F7 Q1 is as follows:
Pv Of 15840 Receivable in 12 months @ 10% interest [15840*1.1^-1] A 14,400.00
Pv Of 15840 Reivable in 3 months (As at Date of SFP) @ 10% interest [15840*(1+(0.1/12))^-3] B 15,450.51
Financial Cost For SCI B-A 1,050.51
Examiners Solution Fin Expense = 14400X10%X9/112 1080
Dear Tutor and fellow students out there, please tell me why my calculation is wrong as based on the above workings for the given qusetion
Because the deferred amount has been outstanding for 9 months by the date of consolidation…..so the 14,400 should now be unrolled at 10% for 3/4 of the year rather than take the amount payable in 1 year and reducing it by 3 months’ discount.
wow NGU m impressed by ur method.. a very good question indeed.. 🙂
Let me go into a little financial management to spot the difference:In examiner’s solution the examiner has used the simple interest method to unwind the discount i.e same interest is being charged every month on straight line basis.. This is simple and quick approach used in financial reporting papers.
However in your calculation there is a built-in assumption that the interest is being compounded every month(i.e. besides principle interest is also being charged on the previous month’s interest as well at an equivalent monthly rate of annual 10% interest) the effect of which is that in the earlier months less interest is being unwinded while in the later months more interest is being unwinded because of the interest on interest effect.. Technically speaking your calculation is also correct and practically being used in many banks to calculate the amortization on different securities.
btw there is a little mistake in your calculation of present value for 3 months B 15,450.51 look at this way:
using this method if i calculate present value for 12 months it would be [15840*(1+(.1/12))^-12] = 14338 !! although it should b 14400.. (it’s not a rounding off issue)
the accurate method to calculate present value of 3 months is this.
first calculate equivalent monthly rate in this way [(1 + annual rate) = (1 + equivalent monthly rate)^no of months in a year] it becomes (1 + 10%) = (1 + x ) ^ 12
x = 0.7974140% being the equivalent monthly rateNow calculate present value for 3 months in this way:
15840 / 1.00797414^3 = 15,467.🙂
Check this for 12 months
15840 / 1.00797414^12 = 14,400..!! 🙂 cheers 🙂Well done Nokia! Very impressive 🙂
Ngu, you need NONE of that for your F7 exam. Having arrived at the amount of 14,400, simply unroll it by 9/12ths of the year’s unrolled discount.
But congratulations to Nokia for that clear explanation
I was trying out the Balance Sheet Approach to dertemining SCI items using movement in carrying amounts of liabilities (dertermined using fair value) in the SFP between recognition, reporting and settlement dates. Apparantly I lost it by assuming that the discount was compounding monthly wich is not in the question. The equivalent anual interest is a revealation to me, thanks to Nokia. I will save these aproaches for Financial Management Papers, thank you Mike
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