AM mock - q59 (capital lease)

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

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…

The trick is that the payments are at the beginning of the lease. Since the first payment is at beginning, the lease balance is $8,000 at t=2. The accrued interest in Y2 is $960 calculated as 12% of $8,000 (new lease balance).

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!

which mock is this?

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.

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.