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MGT401 Financial Accounting II Assignment 2 Solution Spring 2013

Assignment: 2

Learning Objective

This activity aims to develop among the students an understanding as how to determine lease rentals and their presentations in the accounts along with necessary disclosure as per IAS 17.

Learning Outcomes

After going through this activity, the students would be able to analyze lease terms, determine period lease rentals, preparing lease amortization schedule, and presentation in the accounts along with necessary supporting schedule.

Case

Raccoon Leasing Company (RLC) enters into a non-cancellable lease agreement on 1st January, 2012 to lease electronic equipment to Electronics Company Limited (SCL).

This lease agreement bears the following terms built therein:

 

a)      Lease payments are required at the beginning of each year over the 5 year.

b)      Economic life of the leased equipment is estimated at 8 years.

c)      Fair value of the equipment determined on 1st January,2012 at Rs.81,000 and lessor’s cost Rs. 65,000

d)     Both the lessor’s implicit rate and the lessee’s incremental borrowing rate are 10%.

e)      The lessor has bargain-purchase option price of Rs. 4,000 at end of lease term.

f)       The equipment will revert to RLC at the end of the lease term.

 

The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee uses straight-line depreciation method is used for all of his fixed assets.

The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor.

 

 

Requirement

 

a)      Calculate the amount of annual lease rentals.                                     (3 Marks)

b)      Prepare an amortization schedule separating the above computed rental into interest and principle retired.                                                                        (8 Marks)

c)      Prepare extracts as per IAS 17 to be disclosed by the lessee for its balance sheet and income statement for a period of 2013 & 2014.                                  (13 Marks)

d)     Prepare extracts as per IAS 17 to be disclosed by the lessor for its balance sheet and income statement for the period of 2013 as to Gross Investment on Lease, Net Investment in Lease and unearned finance income.                         (6 Marks)
Solution:

A: – Calculate the amount of annual lease rentals.     

Fair Value       = Rs. 81,000

Instalments     = 5

IRR p.y.          = 10%

Lease rental     = 81000/3.7098= RS.              

 

B: – Prepare an amortization schedule separating the above computed rental into interest and principle retired

 

Lease rental

fin. Charge

principal

outstanding

    81000

   21,367.52

     8,099.97

   13,267.55

   67,732.45

   21,367.52

     6,773.22

   14,594.30

   53,138.15

   21,367.52

     5,313.79

   16,053.74

   37,084.41

   21,367.52

     3,708.41

   17,659.11

   19,425.30

   21,367.52

     1,942.50

   19,425.02

   25,837.89

   80,999.72

 

 

C:-  Prepare extracts as per IAS 17 to be disclosed by the lessee for its balance sheet and income statement for a period of 2013 & 2014.

Electronics Company Limited (SCL)

Balance Sheet

As At 31 December, 2014

                                                                                    2014                           2013

                                                            Note               Rs.                              Rs.

Assets

Non-Current Assets

Leased Finance Fixed Asset                                         37,084.41                           53,138.15

Current Liabilities

Obligation under Lease Finance                                    17,659.11                          37,084.41

Long-Term Liabilities

Obligation under Lease Finance                                 19,425.30                             37,084.41

 

 

 

Electronics Company Limited (SCL)

Income Statement

For The Year Ended 31 December, 2014

                                                                                    2014                           2013

                                                            Note               Rs.                              Rs.

Revenue                                                                      —                                —

Cost of Sales                                                               10,125                         10,125

Gross profit                                                                 —                                —

 

OR

 

Admin / Selling Expenses                   3                      10,125                         10,125

Operating profit                                                          —                                —

Financial Costs                                                            5,313.79                        6,773.2

Profit before Tax                                                         —                                —

 

  1. Fixed Assets For The Year 2014

Particulars

Cost

R

A

T

E

Accumulated Depreciation

 

As on Jan. 01 2014

Addition

Disposal

As on Dec. 31 2014

As on Jan. 01 2014

On Disposal

For The Year

As on Dec. 31 2014

WDV As on Dec. 31 2014

Assets Subject To Finance Lease

electronic equipments

12.5%

10,125

Note: The lessor has bargain-purchase option price of Rs. 4,000 at end of lease term.

 

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