FIN328 Tutorial - IAS17

Question 1 P Limited entered into five-year lease on 1 January 2003 for a machine with a fair value of $20,000. Rentals are $5,200 per annum payable in advance. P Limited is responsible for insurance and maintenance costs. The rate of interest implicit in the lease is 15.15%. You are required to show the allocation of finance changes on the sum of the digits basis and on actuarial basis and comment on the result.

Question 2 On 1 April 2007, Fino increase the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of $350,000. On the recommendation of the finance director, Fino entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of $100,000 each commencing on 1 April 2007. The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the companys return on capital employed. Required: 1. Discuss the validity of the finance directors comment and describe how IAS 17 Leases ensures that leases such as the above are faithfully represented in any entitys financial statements. 2. Prepare extracts of Finos income statement and balance sheet for the year ended 30 September 2007 in respect of the rental agreement assuming: (i) It is an operating lease (ii) It is a finance lease (use an implicit interest rate of 10% per annum).

Past exam question Question 3 (Jan 2011)

(a) (b)

Explain how leases are accounted for in the books of the lessee under IAS 17 Leases. (8 marks) Gabby, which prepare its account to 31 December each year, leases a plant from Kana on 1.1.2002 on the following terms: Gabby is to pay RM40,000 immediately, with 3 further installments of RM40,000 each year beginning on 1.1.2003. The agreed fair value of the asset is RM139,475. The interest rate implicit in the lease is 10%.

At the end of the lease period the title to the asset is transferred to the lessee. The expected economic life of the asset is 5 years and the residual value of the asset at the end of that time is zero. Required: (i) (ii) (iii) Calculate the interest charges using the actuarial method for the whole duration of the lease period Show, in the books of the lessee, the extracts of the income statement, balance sheet and the notes to the accounts for the year 2002 Show, in the books of the lessor, the extracts of the income statement, balance sheet and the notes to the accounts for the year 2002 (17 marks) (Total: 25 marks)