Calculating the Finance Charge Using the Actuarial Method

E-book and homework are attached

Exercise 1

Endale Ltd (which applies IAS17) prepares accounts to 31 March each year. On 1 April 2016, the company acquired an asset by means of a finance lease. The fair value of the asset on this date was £40,000 and the company was required to make six half-yearly lease payments of £7,674 each. The first payment was payable on 1 April 2016. The rate of interest implicit in the lease was 6% per half-year.

Calculate the finance charge which should be recognised as an expense in the company's financial statements for each of the years to 31 March 2017, 2018 and 2019, using:

(a)       the actuarial method (prepare a table with one row for each half-year)

(b)   the sum of digits method

(c)    the level spread method.

Exercise 2

On 1 July 2015, Helvelyn Ltd (which applies IAS17) entered into a finance lease to acquire a machine. The cash price of the machine would have been £132,000. The lease agreement specified that the company would make four lease payments, each of £45,303, on 30 June 2016, 2017, 2018 and 2019. The interest rate implicit in the lease was 14% per annum. Helvelyn Ltd prepares accounts to 30 June each year.

Using the actuarial method to allocate finance charges over the lease period, calculate the finance charge which should be shown as an expense in the company's financial statements for each of the years to 30 June 2016, 2017, 2018 and 2019. Also show how the liability to the lessor should be represented in the statement of financial position of Helvelyn Ltd on 30 June 2016.

EXERCISE 3

Glassmere Ltd (which applies IAS17) prepares accounts to 31 December each year. On 1 January 2014, the company acquired an asset by means of a finance lease. Details of the lease agreement are as follows:

Cash price of leased asset                   £27,500

Lease term                                          5 years

Payments due annually in advance    £6,595 each

Useful life of asset                              7 years

Residual value                                                 £3,000

Rate of interest implicit in lease                     10% per annum

Glassmere Ltd will obtain legal ownership of the asset at the end of the lease term. The company calculates depreciation on the straight-line basis.

Assuming that the actuarial method is used to allocate the finance charge over the lease term, calculate the finance charge and depreciation charge which should be shown in the company's financial statements for each of the years to 31 December 2014, 2015, 2016, 2017 and 2018.

Also calculate the liability to the lessor at the end of each of these years and show how this liability should be split between current liabilities and non-current liabilities.