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Question 11.I.14: For the Hypothetical Finance Ltd. (HFL) in Illustration 11.1......

For the Hypothetical Finance Ltd. (HFL) in Illustration 11.13, assume that the initial cost of structuring the deal is Rs 1.2 lakh. Using the effective rate of interest method for allocating finance income, show how the transaction will appear in the books of the HFL. You can make other assumptions, if necessary.

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Allocation of Unearned Finance Income (ERI: 26.1%) (Rs lakh)

Capital\>recovery Interest\>component Instalment Outstanding\>amount\>at\>the\>beginning Year
19.21 23.54 42.75 112.50 1
24.22 18.52 42.75 93.29 2
30.55 12.22 42.75 69.09 3
38.53  4.22 42.75 38.52 4

Record in Financial Statements:

Income Statement (Rs lakh)

Amount \qquad\qquad\,Income\qquad\qquad\qquad Amount Expenses\qquad\qquad\qquad
Year 2 Year 1 Year 2 Year 1
18.52 23.54 Hire finance income — 1.2 Direct costs

Balance Sheet (Rs Lakh)

Amount \qquad\qquad\qquad Assets \qquad\qquad\qquad Amount Liabilities\qquad\qquad\qquad\qquad
Year 2 Year 1 Year 2 Year 1
Current assets: Current liabilities:
Stock hire (agreement value less   Finance income/charge
85.49 128.24 amount/instalment received) 16.42 34.95   (unmatured/unearned)

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