Accountancy Forum

Hi
I have a problem in lease accounting...while preparing lease amoritization schedule...if the fair value of leased asset is less than present value of MLP then what figure will we use?
present value of MLP or fair value of Asset...
also in this type of problem the interest rate use is calculated by trail and error method...what is this trail and error method?
I am pasting the original problem..

A lease was signed on Jan 1, 2001 for four years. Annual rentals payable at beginning of each year were agreed at Rs 13000. Lessor's implicit rate is not known. The lessee's incremental borrowing rate is 20%. Fair value of equipment was Rs 40000.
Bargain purchase option is Rs 1500.

now in this problem the Present Value of MLP will be Rs 41107.62.
the fair value of asset is Rs 40000.
in lease amoritization schedule what figure will be used...Rs 41107.62 or Rs 40000

also the interest rate that will be use in lease amoritization schedule will be calculated by trail and error method...that worked out to be 22.53145%...how it is calculated...and y is it used instead of 20%.

Ace

ok leave that problem...just tell me do anybuddy know about this "trail and error" method...yaar yeh term Javaid Zuberi ki book mein use hui hai...

Ace

<BLOCKQUOTE id=quote><font size=1 face="Verdana, Tahoma, Arial" id=quote>quote<hr height=1 noshade id=quote>
ok leave that problem...just tell me do anybuddy know about this "trail and error" method...yaar yeh term Javaid Zuberi ki book mein use hui hai...

Ace
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote></font id=quote><font face="Verdana, Tahoma, Arial" size=2 id=quote>

Trial and error means to check and satisfy a given problem by substituting different values in the equation....

This is in mathematics, dont know nothing that why its used in accounting

cashflows
0 27000
1 -13000
2 -13000
3 -14500

IRR 22.89%
1. fair value is netted with first payment as the payment is in advance. lower of fairvalue or MLP needs to be taken (IAS 17)
2. Bargain purchase price added at period 3 (end of year 3)
3. lessor implicit rate should be taken (IAS 17) unless impossible.
4. IRR calculated via excel. You can use trial and error method to calculate IRR by discounting the cash flows CF as to achieve zero NPV (characteristic of IRR) - read IAS 17 and Zuberi and other easily available literature.
Trial error e.g you discount the above CF at 20% resulting in +ve NPV then you increase your discount rate to 25% resulting in -ve NPV.
Now use both NPVs and use interpolation method to find IRR. Another way is to graph NPV/IRR lines and the intersection of the two is IRR.

Amortisation schedule
opening p P I closing p
27,000.00 6,819.87 6,180.13 20,180.13
20,180.13 8,380.90 4,619.10 11,799.23
11,799.23 10,299.23 2,700.77 1,500.00


NB. ask some1 preparing for exam to help you exactly. hopefully u get the concept.