FINANCE ACCOUNTING COACH | Free Online Accountant Reference Site » ACCOUNTING TOPICS http://fmaccounting.com Covering Finance, Treasury, Accounting, Treasury, Taxation and Management Tue, 27 Jul 2010 01:54:33 +0000 en hourly 1 http://wordpress.org/?v=3.0 An Example To Illustrate How To Classify A Lease As Finance Lease http://fmaccounting.com/an-example-to-illustrate-how-to-classify-a-lease-as-finance-lease/ http://fmaccounting.com/an-example-to-illustrate-how-to-classify-a-lease-as-finance-lease/#comments Wed, 02 Dec 2009 14:40:25 +0000 slang http://fmaccounting.com/?p=1673 Below example demonstrate how to classify a lease into a finance lease:

Question:

ABC Ltd enters a lease agreement on 1 January 2009 to have the right to use the asset for 10 years. The economic life of the asset is 11 years. The fair value of the asset is $12 million. The lessee agreed to pay $1.6 [...] Related posts:

  1. Sale And Leaseback-How To Determine whether it is A Finance Lease or Operating Lease And Accounting Treatment
  2. Characteristic Of Finance Lease
  3. Understand The Differences Between Finance Lease And Operating Lease
  4. Accounting For Finance Lease
  5. Technical Summary Of IAS 17 Leases
  6. Technical Summary Of IAS 40 Investment Property
  7. Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
]]>

Below example demonstrate how to classify a lease into a finance lease:

Question:

ABC Ltd enters a lease agreement on 1 January 2009 to have the right to use the asset for 10 years. The economic life of the asset is 11 years. The fair value of the asset is $12 million. The lessee agreed to pay $1.6 million annually for 10 years at the beginning of each year. The present value of the minimum lease payment is $10.5 million.

Required: How should the lease be classified?

Answer:

On the inception date 1 January 2009, the lease will be classified as a finance lease due to:

  • the lease period is 10 years, which is 91% of the economiclife of the asset. Therefore it meets the criteria being the lease forms the major part of the economic life of the assets, even if its title is not transferred
  • the present value of the minimum lease period is substantially all (87.5%) of the fair value of the asset

The asset will be depreciated over 10 years.

Related posts:

  1. Sale And Leaseback-How To Determine whether it is A Finance Lease or Operating Lease And Accounting Treatment
  2. Characteristic Of Finance Lease
  3. Understand The Differences Between Finance Lease And Operating Lease
  4. Accounting For Finance Lease
  5. Technical Summary Of IAS 17 Leases
  6. Technical Summary Of IAS 40 Investment Property
  7. Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)

]]> http://fmaccounting.com/an-example-to-illustrate-how-to-classify-a-lease-as-finance-lease/feed/ 0 How To Apportion Hire Purchase Interest-Using Sum Of Digit Method Or Rule Of 78 (Part 3 of 3) http://fmaccounting.com/how-to-apportion-hire-purchase-interest-using-sum-of-digit-method-or-rule-of-78-part-3-of-3/ http://fmaccounting.com/how-to-apportion-hire-purchase-interest-using-sum-of-digit-method-or-rule-of-78-part-3-of-3/#comments Tue, 01 Dec 2009 09:44:47 +0000 slang http://fmaccounting.com/?p=1607 Hire purchase interest are apportioned based on the reducing balance method (part 1) and on Straight line basis(part 2).

This final part 3 looks at another commonly used method to apportion hire purchase interest namely the Sum of digit method of Rule of 78 

 Example to illustrate the Sum Of Digit or Rule of 78 method to apportion [...] Related posts:
  1. How To Apportion Hire Purchase Interest-Reducing Balance Method (Part 1 of 3)
  2. How To Apportion Hire Purchase Interest-Straight Line Method (Part 2 of 3)
  3. Hire Purchase, Credit Sales And Rental Agreement
  4. Performance of Companies Listed in Bursa Saham Malaysia from 2007 to July 2009
  5. Accounting For Hire Purchase In The Purchaser’s Book
  6. Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
  7. Difference Between Hire Purchase And Installment System
]]>

Hire purchase interest are apportioned based on the reducing balance method (part 1) and on Straight line basis(part 2).

This final part 3 looks at another commonly used method to apportion hire purchase interest namely the Sum of digit method of Rule of 78 

 Example to illustrate the Sum Of Digit or Rule of 78 method to apportion hire purchase interest. 

Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $3,500. A deposit of $500 is paid and 12 annual installments of $300 being agreed. 

 

$
Cash Price

3,500.00
Deposit

500.00
 

3,000.00
Interest(12 x$300 -$3,000) 

600.00
 

3,600.00

 The installments are numbered as follows: 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sept

Oct

Nov

Dec

Total
12

11

10

9

8

7

6

5

4

3

2

1

78

 The total hire purchase interest of $600.00 is apportioned based on above weight: 

Jan

12/78 x$600 =$92.30
Feb

11/78 x$600 =$84.62
Mar

10/78 x$600 =$76.92
Apr

9/78 x$600 =$69.23
May

8/78 x$600 =$61.54
Jun

7/78 x$600 =$53.85
July

6/78 x$600 =$46.15
Aug

5/78 x$600 =$38.46
Sept

4/78 x$600 =$30.77
Oct

3/78 x$600 =$23.08
Nov

2/78 x$600 =$15.39
Dec

1/78 x$600 =$ 7.69
 

                    $ 600.00

 

Related posts:

  1. How To Apportion Hire Purchase Interest-Reducing Balance Method (Part 1 of 3)
  2. How To Apportion Hire Purchase Interest-Straight Line Method (Part 2 of 3)
  3. Hire Purchase, Credit Sales And Rental Agreement
  4. Performance of Companies Listed in Bursa Saham Malaysia from 2007 to July 2009
  5. Accounting For Hire Purchase In The Purchaser’s Book
  6. Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
  7. Difference Between Hire Purchase And Installment System