Hi all,
Could someone help me with this problem please. I don't seems to know how to handle it.

thanks in advance.

Facts: given the following information:

Lease term 7 Years from March 31, 200X
Rental payments: $ 3,574 payable annually in advance
Asset cost: $ 20,000
Expected residual value: nil
Lessor‘s year-end date 30 September
Internal interest rate 8,1978 %

Required:
Determine the finance income for each accounting period.

The question asking for the lessor's "finance income" implies that this is a "capital lease", an implication supported by the fact that the asset will have ≈ zero value at the end of the lease term.

This means that the lessor has, in theory, actually sold the asset to the lessee. You view it as a sale, with the lessee giving an interest-bearing installment note to the lessor for the full purchase price.

The terms of this note call for 7 annual payments of 3,574 each, with the first being due immediately; the other six due in one-year intervals. (Equivalently you could view it as the lessee making a 3,574 down payment and giving a note calling for 6 annual payments of 3,574 beginning one year hence.)

First you need to use the given internal interest (discount) rate to determine the present value of this installment note. This amount will also be the deemed selling price of the asset.

Next set up an amortization schedule for this note, using the present value you've just determined as the initial amount of the note.

Then from this amortization schedule you can see the amount of interest income earned by the lessor during each of the six periods.

Finally, allocate the interest income of the 6 lease periods to the lessor's income statements in a pro-rata manner, noting that the lease periods run Mar 31 - Mar 31 whereas the lessor's fiscal year ends each Sep 30.

Quote:

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Originally Posted by gnwokeoha21

Hi all,
Could someone help me with this problem pls. I dont seems to know how to handle it.

thanks in advance.

Facts: given the following information:

Lease term 7 Years from March 31, 200X
Rental payments: $ 3,574 payable annually in advance
Asset cost: $ 20,000
Expected residual value: nil
Lessor‘s year-end date 30 September
Internal interest rate 8,1978 %

Required:
Determine the finance income for each accounting period.

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so what is hard here? Each March 30 a payment is made 7*3574=
On 30th September the lessor determines how much interest has been earned in the year
so for years one through seven how much income is earned?

Quote:

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Originally Posted by paraclete

so what is hard here? each March 30 a payment is made 7*3574=
On 30th September the lessor determines how much interest has been earned in the year
so for years one thru seven how much income is earned?

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Thanks for your helpful advice

Quote:

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Originally Posted by ArcSine

The question asking for the lessor's "finance income" implies that this is a "capital lease", an implication supported by the fact that the asset will have ≈ zero value at the end of the lease term.

This means that the lessor has, in theory, actually sold the asset to the lessee. You view it as a sale, with the lessee giving an interest-bearing installment note to the lessor for the full purchase price.

The terms of this note call for 7 annual payments of 3,574 each, with the first being due immediately; the other six due in one-year intervals. (Equivalently you could view it as the lessee making a 3,574 down payment and giving a note calling for 6 annual payments of 3,574 beginning one year hence.)

First you need to use the given internal interest (discount) rate to determine the present value of this installment note. This amount will also be the deemed selling price of the asset.

Next set up an amortization schedule for this note, using the present value you've just determined as the initial amount of the note.

Then from this amortization schedule you can see the amount of interest income earned by the lessor during each of the six periods.

Finally, allocate the interest income of the 6 lease periods to the lessor's income statements in a pro-rata manner, noting that the lease periods run Mar 31 - Mar 31 whereas the lessor's fiscal year ends each Sep 30.

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Your advice is very helpful and I find it useful