FJ ltd prepares accounts to 31 December each year.
On 1 January 2014, the company acquired an asset by means of
Details of the lease agreement were as follows:
Cash price of leased asset £110,500
Lease term 5 years
Payments due annually in Advance/Arrears £26,380 each
Useful life of asset 7 years
Residual value £12,000
Rate of interest implicit in lease 10% per annum
FJ ltd will obtain legal ownership of the asset at the end of the lease term. The company calculates depreciation on a
Required:
Assuming that the actuarial method is used to allocate the finance charge over the lease term, calculate the finance
company’s financial statements for each of the years to 31 December 2014, 2015, 2016, 2017 and 2018. In addition,
and show how this liability should be split between current liabilities and non-current liabilities.
Solutions-- Advance
Prevent value of the future lease payment
years cashflow DCF 10% PV
0 2014 26,380.00 1.00 26,380.00
1 2015 26,380.00 0.91 23,981.82
2 2016 26,380.00 0.83 21,801.65
3 2017 26,380.00 0.75 19,819.68
4 2018 26,380.00 0.68 18,017.89
110,001.05
Assets Right of Use Assets 2014 2015 2016 2017 2018
Lease Assets 110,001.05 96,000.90 82,000.75 68,000.60 54,000.45
Depreciation (14,000.15) (14,000.15) (14,000.15) (14,000.15) (14,000.15)
Carrying value 96,000.90 82,000.75 68,000.60 54,000.45 40,000.30
Interest rate 10%
Liability side 2014 2015 2016 2017 2018
Lease liability 110,001.05 91,983.16 72,163.47 50,361.82 26,380.00
Installment (from 2nd yr CL) (26,380.00) (26,380.00) (26,380.00) (26,380.00) (26,380.00)
LTLO from 2nd year 83,621.05 65,603.16 45,783.47 23,981.82 0.00
interest 8,362.11 6,560.32 4,578.35 2,398.18 0.00
Lease liability bal c/d 91,983.16 72,163.47 50,361.82 26,380.00 0.00
Solution -- Arrears
Prevent value of the Future Lease Payment
Years Cash flow DCF 10% PV
1 2014 26,380.00 0.91 23,981.82
2 2015 26,380.00 0.83 21,801.65
3 2016 26,380.00 0.75 19,819.68
4 2017 26,380.00 0.68 18,017.89
5 2018 26,380.00 0.62 16,379.90
100,000.95
Assets Right of Use assets 2014 2015 2016 2017 2018
Lease Assets 100,000.95 87,429.39 74,857.82 62,286.26 49,714.69
Depreciation (12,571.56) (12,571.56) (12,571.56) (12,571.56) (12,571.56)
Carrying value 87,429.39 74,857.82 62,286.26 49,714.69 37,143.13
interest rate 10%
Liability 2014
Lease liability 100,000.95 83,621.05 65,603.16 45,783.47 23,981.82
interest 10,000.10 8,362.11 6,560.32 4,578.35 2,398.18
installment (26,380.00) (26,380.00) (26,380.00) (26,380.00) (26,380.00)
Lease liability C/d (LTLO from Yr 2 83,621.05 65,603.16 45,783.47 23,981.82 0.00
STLO (TLO-LTLO) 18,017.89 19,819.68 21,801.65 23,981.82 0.00
ired an asset by means of a lease.
alculates depreciation on a straight-line basis.
erm, calculate the finance charge and depreciation charge which should be shown in the
017 and 2018. In addition, calculate the liability to FJ ltd at the end of each of these years
ilities.
Statement of Profit or Loss Extract
2014 2015 2016 2017 2018
Depreciation (14,000.15) (14,000.15) (14,000.15) (14,000.15) (14,000.15)
Finance charge (8,362.11) (6,560.32) (4,578.35) (2,398.18) 0.00
Statement of Financial Position Extract
2014 2015 2016 2017 2018
Assets
Lease Assets 96,000.90 82,000.75 68,000.60 54,000.45 40,000.30
Liability
NCL
Lease liability 65,603.16 45,783.47 23,981.82 0.00 0.00
CL
Lease liability 26,380.00 26,380.00 26,380.00 26,380.00 0.00
Statement of Profit or Loss Extract
2014 2015 2016 2017 2018
Depreciation (12,571.56) (12,571.56) (12,571.56) (12,571.56) (12,571.56)
Finance charge (10,000.10) (8,362.11) (6,560.32) (4,578.35) (2,398.18)
Statement of Financial Position Extract
2014 2015 2016 2017 2018
Assets
Lease Assets 87,429.39 74,857.82 62,286.26 49,714.69 37,143.13
Liability
NCL
Lease liability 65,603.16 45,783.47 23,981.82 0.00 0.00
CL
Lease liability 18,017.89 19,819.68 21,801.65 23,981.82 0.00
Lease a car
Prepayment
amount -110000
Number 4
Payable at the end of each year
IBR 4%
at the commencement
Right of use
* Amount for lease liability
*Lease paymentbefore or on commencement- Lease incentive
*Inatial indirect cost
*Estimate of dismantling cost
inatial regognition
ROU EQUAL lease liability( no other items)
PV of future lease payment $399,288.47
Debit ROU $399,288.47
CREDIT LL $399,288.47
After commencement
Subsequent measurement
Year Cash flow interest lease liability
0 $399,288.47
1 -110000 $15,971.54 $94,028.46
2 -110000 $12,210.40 $97,789.60
3 -110000 $8,298.82 $101,701.18
4 -110000 $4,230.77 $105,769.23
4%
Lease liability
*commencement dateequal to lease payment not paid at the
ent- Lease incentive discounted
at interest rate implicit in the lease
or incremental borrowing rate
for year 1
debit Lease liability 94028
Lease liability c/f debit p& l 1597
$399,288.47 credit cash 110000
$305,260.01
$207,470.41
$105,769.23 Rou asset
$0.00
debit p& l depreciation 99882
credit Accumulated dep 99822
