FAC3703
ASSIGNMENT 1 SEMESTER 2 2025
UNIQUE NO.
DUE DATE: 1 SEPTEMBER 2025
, Specific Financial Reporting
PART (a) — Compute the interest rate implicit in the lease (3.5 marks)
Data (Transaction 1):
Lease commencement: 1 Aug 2023
Term: 3 years
Annual lease payments (in arrears): R234,500 at 31 July each year (31/07/2024,
31/07/2025, 31/07/2026)
Guaranteed residual value (lessee guaranteed): R80,500 (payable at lease end)
Unguaranteed residual value: R36,000 (not guaranteed by lessee)
Fair value (equipment) at inception: R1,200,000
Initial direct costs (lessee legal fees): R18,000 (lessee) used in ROU cost but not
in lease liability PV equation
Attempt to solve for implicit rate (full numeric working)
Standard equation for an implicit rate r (if the fair value of the asset equals present
value of lease payments including any guaranteed residuals) is:
3
234,500 guaranteed residual
Fair value = ∑ +
(1 + 𝑟)𝑡 (1 + 𝑟)3
𝑡=1
Plugging numbers:
234,500 234,500 234,500 80,500
1 200 000 = + + + .
(1 + 𝑟) (1 + 𝑟) 2 (1 + 𝑟)3 (1 + 𝑟) 3
First check the undiscounted total cash flow to be received by the lessor (payments +
both residuals):
3 × 234,500 = 703,500
guaranteed residual 80,500 + unguaranteed 36,000 = 116,500
ASSIGNMENT 1 SEMESTER 2 2025
UNIQUE NO.
DUE DATE: 1 SEPTEMBER 2025
, Specific Financial Reporting
PART (a) — Compute the interest rate implicit in the lease (3.5 marks)
Data (Transaction 1):
Lease commencement: 1 Aug 2023
Term: 3 years
Annual lease payments (in arrears): R234,500 at 31 July each year (31/07/2024,
31/07/2025, 31/07/2026)
Guaranteed residual value (lessee guaranteed): R80,500 (payable at lease end)
Unguaranteed residual value: R36,000 (not guaranteed by lessee)
Fair value (equipment) at inception: R1,200,000
Initial direct costs (lessee legal fees): R18,000 (lessee) used in ROU cost but not
in lease liability PV equation
Attempt to solve for implicit rate (full numeric working)
Standard equation for an implicit rate r (if the fair value of the asset equals present
value of lease payments including any guaranteed residuals) is:
3
234,500 guaranteed residual
Fair value = ∑ +
(1 + 𝑟)𝑡 (1 + 𝑟)3
𝑡=1
Plugging numbers:
234,500 234,500 234,500 80,500
1 200 000 = + + + .
(1 + 𝑟) (1 + 𝑟) 2 (1 + 𝑟)3 (1 + 𝑟) 3
First check the undiscounted total cash flow to be received by the lessor (payments +
both residuals):
3 × 234,500 = 703,500
guaranteed residual 80,500 + unguaranteed 36,000 = 116,500
