Finance Numericals

Lease : It is a contract between lessor (owner of asset) and lessee (user of asset) in which lessee pays fixed amount for using the lessor's asset for fixed period or for specific purpose. Royalty vs lease payment : Amount paid by lessee to lessor on the output raised from leased asset is known as royalty and amount paid on using the leased asset to lessor is known as lease payment. Advantages of lease: ·         A company is not required to purchase an asset which are used for fixed period only. ·         No need to arrange a big amount to pay only rental value of leased asset. ·         Financing assets through lease may give some tax benefits. ·         Financing through lease is much more easier then taking loan from financial institution. Disadvantages of Lease: ·         Lessee has to return the leased asset after completion of lease period. ·         There is a burden on company to pay lease even if company suffers loss. Types of lease : Sale

Depreciation Fund Method: Under this method the fixed amount is credited to depreciation fund a/c and that amount is charged from Profit & Loss account as depreciation. The equal amount is invested in outside securities (gilt-edge security) and the interest earn from it is reinvested in securities. When the life of asset is over at that time the securities are sold out and money is realised to purchase new asset. This method is also known as Sinking Fund Method and with the help of sinking fund table we can find out the depreciation amount. Example: In January 1 st 2009 Company was purchased a machine for Rs.70, 000. The estimated life of asset is 4 years. Company had decided to charge depreciation @ 5% by using sinking fund method.  On 2012 machine was sold out at Rs.51, 100. Prepare depreciation fund a/c and depreciation fund investment a/c. Solution: depreciation = 0.232012*70,000 = Rs.16, 240.84     Depreciation Fund A/c Date Particular J.F