AM mock - q59 (capital lease) 200, beginning, interest, question

andytrader

hi guys,
can you please help me the question below?

---q59/FSA/capital leases---

my answer was B, which is incorrect.

annual lease PMT = 2,000
./. implicit interest t=1 10,000*.12
= depreciation in t=1
= 800

beginning balance of capital lease on BS = 9,200
implicit interest in t=2 9,200*.12=1,104

the solution deducts the WHOLE lease pmt from the initial BS value so that the opening balance in year 2 is 8,000. but this is incorrect to do, isnt it?

cheers

thisisbrianly

Hi,

There is a condition in the question - "if PV of the lease payments = fair value of the equip. at the inception on the lease"
Meaning consider the value of 10,000 - 2000 (annual Lease) = 8000
Now the beg balance of 2nd year will be 8000 and multiply it by 12% to get 960 as an interest expense -


Good Luck..

bapswarrior

aahh ok, now i see it, too. because pmt are at the beginning of each year, no interest has accrued yet for the 1st year (the balance of the lease principal was not outstanding yet). so the full first payment is principal reduction / depreciation only. thanks again!

rgonzalez

the CFAI mock. They emailed all candidates aprox 3 weeks ago that the exam was ready for you to download.

go to the CFA website, log in and DL the morning and afternoon session, very good review.

Wasteoftime

And also, don't forget to download the mocks for levels II and III as well, will be useful next year and the one after that.