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 Topic: F5 Leasing question ( Topic Closed)
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RshaoKh
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Joined: 28 Jul 2009
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| Posted: 14 Sep 2009 at 10:24 | IP Logged
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CPA-00396
Cott, Inc. prepared an interest amortization table for a five-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of five years, the balance in the leases payanle column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?
Answer: The beginning present value of the lease did not include the present value of the bargain purchase option.
Could someone explain why the answer wasn't "Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period." I think it has something to do with the error being lower but not being zero yet...
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bryris
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| Posted: 14 Sep 2009 at 10:35 | IP Logged
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If the lease had been discounted as an ordinary annuity, at the inception of the lease (before any payments), the PV would have been less than as an annuity due because of extra discounting on the first payment. With an annuity due, the first payment comes off the top and the remaining payments are discounted. Thus, AFTER the first payment of the annuity due, the PV of the lease payments is now LESS than the OA.
Accordingly, amortization of the the lease as an ordinary annuity when it was actually an annuity due would have resulted in an ending lease payable balance at the end of the five years at something greater than zero. Since the beginning lease payable balance of a lease discounted as an OA is higher than that of an annuity due (the first payment came off entirely as principal), the interest payments will be higher, resulting in less allocation to paying down principal - which would leave a balance at the end of the term.
At the end of the term, the LO should have been equal to the bargain purchase option.
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RshaoKh
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| Posted: 14 Sep 2009 at 10:42 | IP Logged
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Thanks!
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