1. Financial Accounting II Lecture 29

2. Present value has been defined in the framework as:
A current estimate of the present discounted value of the future net cash flows in the normal course of business.

3. Time Value of Money
Present Value &
Future Value

4. ( )1
Today One Year Later
Rs Rs. 112

5. Compounding / Future Value
Present Value x ( 1 + r ) time
100 x (1+0.12)1
= 112

6. Discounting / Present Value
Future Value x ( 1 + r ) -time
112 x (1+0.12)-1
= 100

7. PV 1 2 3 4 5 6 7 8 9 10 11 12
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
PV 112,550

8. NOTE: this is the same slide used as slide 18 in lecture 28
NOTE: this is the same slide used as slide 18 in lecture 28. copy it from there

9. Future Value x (1+i)-time
Present Value Factor
Future Value x (1+i)-time
Present Value Factor

10. Interest Rate Implicit in the Lease (IRR)
Interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the Unguaranteed residual value to be equal to the sum of (i) the fair value of the leased asset and (ii) any initial direct costs of the lessor.

11. Presentation and Disclosure of Finance Leases
Cash price of the asset Rs. 771,000.
Assets leased on Jul 01, 05
Lease payments:
Security deposit Rs. 200,000
Lease rentals include 4 annual installments starting from June 30, 06.
IRR 15% p.a.
Depreciation to charged at 20% on WDV.
Residual value Rs. 200,000. The contract has an option to adjust the security deposit against the residual value.

13. Recording
Recording of asset at the inception of lease July 01, 2005:
Dr. Asset Sub. to Fin. Lease 771,000
Cr. Liability Sub. to Fin. Lease ,000

14. Recording
Transfer to current maturity at the inception of lease July 01, 2005:
Dr. Liability Sub. to Fin. Lease 114,350
Cr. Current Maturity of Lease ,350

15. Recording
Payment of security deposit July 01, 2005
Dr. Security Deposits 200,000
Cr. Bank ,000

16. Recording
Payment of first rental June 30, 2006:
Dr. Current Maturity 114,350
Dr. Financial Charges ,650
Cr. Bank ,000

17. Recording
Transfer to current maturity at the inception of lease June 30, 2006:
Dr. Liability Sub. to Fin. Lease 131,502
Cr. Current Maturity of Lease

18. Recording
Depreciation June 30, 2006:
Dr. Depreciation Exp ,200
Cr. Accumulated Dep ,200

19. Information to be Disclosed
Profit and Loss Account for the Year June 30, 2006:
Depreciation Rs. 154,200
Lease finance charges Rs. 85,650

20. Information to be Disclosed
Balance Sheet as at June 30, 2006:
Non-current Assets
Carrying amount of the
Asset Rs. 616,800
“Assets Subject to Finance Lease”
Security Deposit Rs. 200,000

21. Information to be Disclosed
Balance Sheet as at June 30, 2006:
Current Liabilities
Current Maturity of
Long Term Liabilities Rs. 131,502

22. Information to be Disclosed
Balance Sheet as at June 30, 2006 (Non Current Liabilities):
On the face of the balance sheet, sum of following figures will be shown under “Liabilities Against Asset Subject to Finance Lease”
Principal portion of 3rd and 4th Installments (to be paid on June 30, 2008 and 2009 amounting to Rs. 151,228 and 173,920 respectively)
Residual value of the asset amounting to Rs. 200,000.

23. Disclosure Balance Sheet
Balance Sheet as at June 30, 2006 (Non Current Liabilities):
In the notes to the accounts following information will be disclosed other than the narrative notes
reconciliation between the opening and closing balance of the non-current liability
disclosure of minimum lease payments payable within; 1 year; 2 to 5 years; and more than 5 years (if required) and a reconciliation of MLP and their Present Values.