Question

An Auto Finance Company (AFC) is doing business forlast 20 years and offers various financial products including finance lease, hire purchase and operating lease.

AFC takes postdated cheques from customers in advance and deposits with banks on due dates. AFC enters the realization date of all cheques in system on daily basis. Average numbers of daily deposited cheques are 700. Around 10% of deposited cheques gets returned unpaid. The unpaid cheques are deposited next day into bank. The AFC cannot switch to Direct Debit because of certain reasons

The AFC is following IFRS for accounting. The company follows the policy to round rental amount to zero decimal places. The rentals are amortized using annuity method. The company books income on monthly basis.

The AFC has extended a lease facility to a Ltd. company, the extracts of which are as under:

• Asset cost = 100,000

• Contract terms = 48 months

• Annual interest rate = 9%

• Re-payment frequency = Quarterly in Arrear

• RV = 10,000

• Down payment = 8,000

• Security deposit = 50,000

• Start day of the contract = 15th February, 2018

• Asset useful life = 60 months

• Rental numbers 9 to 16 should be double in amount as compared to rental numbers 1 to 8 (e.g. if rental numbers 1 to 8 are 5,000 each then rental numbers 9 to 16 should be 10,000 each)

• Use of XLS Goal Seek is prohibited for rental calculation

You are required to:

1. Determine the lease type according to IFRS definitions for both lessee and lessor. Please mention all criteria of IFRS and identify that which one is met and which one is not

2. Calculate periodic lease rentals

3. Based on point 2 above, prepare amortization schedules for AFC

4. Calculate the AFC’s achieved rate of return.

5. Prepare all accounting entries for AFC starting from contract signing till restructuring. Accounting entry must be with reference to a date

6. The AFC customer has defaulted after paying 2nd rental and now 5th rental is due. Customer has requested and AFC agreed to restructure the lease facility by increasing interest rate 1 % p.a. and recovering the interest overdue and penalty amount upfront. The company charges 20% p.a. penalty for overdue on actual days basis. Please workout the restructured rental amount, New Amortization schedule and the accounting treatment at restructuring this contract. Please keep the Zero rental or fix amount rental same as mentioned in the original scenario

Answer 1

1. Lease type as per IFRS

Lease is a contract which explains an agreement between two or more persons that creates enforceable rights and obligations for right to use an asset for the fixed period of time in exchange for the interest. There are mainly 2 types of lease as per the IFRS norms such as operating lease and finance lease (Brigham and Houston, 2009).

An operating lease is particularly attractive to those companies that consistently replace its machinery and need to use the equipment without buying the full amount. It is less costly and helpful for the company for the long term benefits without investing bulk of money (Harrison, 2008).

Finance lease is full payouts; it is non cancellable agreements in which the lessee is responsible for the maintenance, taxes and insurance . Financial lease is very much attracting those lenders who are looking for the tax benefits. For capital lease amortization is must be applied to pay both interest and principal .

There are some other types of lease such as capital lease, direct financing lease, first amendment lease full payout lease and net lease.

2. Calculate the periodic lease Rentals for 10th and 11th quarter

Quarter	Payment	Principal Paid	Interest Paid	Remaining Balance
1	$7,341.06	$4,581.06	$2,760.00	$87,418.94
2	$7,341.06	$4,718.49	$2,622.57	$82,700.45
3	$7,341.06	$4,860.05	$2,481.01	$77,840.40
4	$7,341.06	$5,005.85	$2,335.21	$72,834.55
5	$7,341.06	$5,156.02	$2,185.04	$67,678.53
6	$7,341.06	$5,310.70	$2,030.36	$62,367.83
7	$7,341.06	$5,470.03	$1,871.03	$56,897.80
8	$7,341.06	$5,634.13	$1,706.93	$51,263.67
9	$7,341.06	$5,803.15	$1,537.91	$45,460.52
10	$7,341.06	$5,977.24	$1,363.82	$39,483.28
11	$7,341.06	$6,156.56	$1,184.50	$33,326.72
12	$14682.12	$6,341.26	$999.80	$26,985.46
13	$14682.12	$6,531.50	$809.56	$20,453.96
14	$7,341.06	$6,727.44	$613.62	$13,726.52
15	$7,341.06	$6,929.26	$411.80	$6,797.26
16	$7,001.18	$6,797.26	$203.92	$0
Totals	$117,117.08	$92,000.00	$25,117.08

From the above, it has been found that, AFC has not been able to receive the 10th quarter and the 11th quarter money which has been adjusted in the 12 and 13th quarter by the lessee . The total amount paid during the 12 and 13 the shows the double amount b paid by the company for managing the their fixed payment details .

3. Prepare Amortizations schedules for AFC

DATE	PAYMENT	PRINCIPAL	INTEREST	TOTAL INTEREST	BALANCE
Mar. 2013	$2,633.38	$1,633.38	$1,000.00	$1,000.00	$98,366.62
Apr-13	$2,633.38	$1,649.72	$983.67	$1,983.67	$96,716.90
May-13	$2,633.38	$1,666.21	$967.17	$2,950.84	$95,050.68
Jun-13	$2,633.38	$1,682.88	$950.51	$3,901.34	$93,367.81
Jul-13	$2,633.38	$1,699.71	$933.68	$4,835.02	$91,668.10
Aug. 2013	$2,633.38	$1,716.70	$916.68	$5,751.70	$89,951.40
Sept. 2013	$2,633.38	$1,733.87	$899.51	$6,651.22	$88,217.53
Oct. 2013	$2,633.38	$1,751.21	$882.18	$7,533.39	$86,466.32
Nov. 2013	$2,633.38	$1,768.72	$864.66	$8,398.05	$84,697.60
Dec. 2013	$2,633.38	$1,786.41	$846.98	$9,245.03	$82,911.19
Jan. 2014	$2,633.38	$1,804.27	$829.11	$10,074.14	$81,106.92
Feb. 2014	$2,633.38	$1,822.31	$811.07	$10,885.21	$79,284.61
Mar. 2014	$2,633.38	$1,840.54	$792.85	$11,678.06	$77,444.07
Apr-14	$2,633.38	$1,858.94	$774.44	$12,452.50	$75,585.13
May-14	$2,633.38	$1,877.53	$755.85	$13,208.35	$73,707.60
Jun-14	$2,633.38	$1,896.31	$737.08	$13,945.42	$71,811.29
Jul-14	$2,633.38	$1,915.27	$718.11	$14,663.54	$69,896.02
Aug. 2014	$2,633.38	$1,934.42	$698.96	$15,362.50	$67,961.59
Sept. 2014	$2,633.38	$1,953.77	$679.62	$16,042.11	$66,007.83
Oct. 2014	$2,633.38	$1,973.31	$660.08	$16,702.19	$64,034.52
Nov. 2014	$2,633.38	$1,993.04	$640.35	$17,342.54	$62,041.48
Dec. 2014	$2,633.38	$2,012.97	$620.41	$17,962.95	$60,028.51
Jan. 2015	$2,633.38	$2,033.10	$600.29	$18,563.24	$57,995.42
Feb. 2015	$2,633.38	$2,053.43	$579.95	$19,143.19	$55,941.99
Mar. 2015	$2,633.38	$2,073.96	$559.42	$19,702.61	$53,868.02
Apr-15	$2,633.38	$2,094.70	$538.68	$20,241.29	$51,773.32
May-15	$2,633.38	$2,115.65	$517.73	$20,759.02	$49,657.67
Jun-15	$2,633.38	$2,136.81	$496.58	$21,255.60	$47,520.86
Jul-15	$2,633.38	$2,158.17	$475.21	$21,730.81	$45,362.69
Aug. 2015	$2,633.38	$2,179.76	$453.63	$22,184.44	$43,182.93
Sept. 2015	$2,633.38	$2,201.55	$431.83	$22,616.27	$40,981.38
Oct. 2015	$2,633.38	$2,223.57	$409.81	$23,026.08	$38,757.81
Nov. 2015	$2,633.38	$2,245.81	$387.58	$23,413.66	$36,512.00
Dec. 2015	$2,633.38	$2,268.26	$365.12	$23,778.78	$34,243.74
Jan. 2016	$2,633.38	$2,290.95	$342.44	$24,121.22	$31,952.79
Feb. 2016	$2,633.38	$2,313.86	$319.53	$24,440.74	$29,638.94
Mar. 2016	$2,633.38	$2,336.99	$296.39	$24,737.13	$27,301.94
Apr-16	$2,633.38	$2,360.36	$273.02	$25,010.15	$24,941.58
May-16	$2,633.38	$2,383.97	$249.42	$25,259.57	$22,557.61
Jun-16	$2,633.38	$2,407.81	$225.58	$25,485.14	$20,149.80
Jul-16	$2,633.38	$2,431.89	$201.50	$25,686.64	$17,717.92
Aug. 2016	$2,633.38	$2,456.20	$177.18	$25,863.82	$15,261.71
Sept. 2016	$2,633.38	$2,480.77	$152.62	$26,016.44	$12,780.95
Oct. 2016	$2,633.38	$2,505.57	$127.81	$26,144.25	$10,275.37
Nov. 2016	$2,633.38	$2,530.63	$102.75	$26,247.00	$7,744.74
Dec. 2016	$2,633.38	$2,555.94	$77.45	$26,324.45	$5,188.81
Jan. 2017	$2,633.38	$2,581.50	$51.89	$26,376.34	$2,607.31
Feb. 2017	$2,633.38	$2,607.31	$26.07	$26,402.41	$0.00

Accounting Entries for AFC lease constructing

Particulars	Debit	Credit
Fixed asset	100,000
Lease liability		92000
Cash		8000

accounting entries at the time of receipt of first’s rentals

For AFC

Particulars	Debit	Credit
Lease liability	$7,341.06
Interest	$2,760.00
Cash		10101.06