Leasing- Exam Standard Question

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    On 1 April 2010, Sincare increased 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, Sincare
    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 2010. 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 company’s return on capital employed
    (compared to outright purchase of the plant).
    (i) Discuss the validity of the finance director’s comment and describe how IAS 17 Leases ensures that
    leases such as the above are faithfully represented in an entity’s financial statements.
    (ii) Prepare extracts of Sincare’s income statement and statement of financial position for the year ended 30
    September 2010 in respect of the rental agreement assuming:
    (1) It is an operating lease
    (2) It is a finance lease (use an implicit interest rate of 10% per annum)


    Operating lease:
    I/S – (10,000 X 6/12)=50,000

    Finance Lease:
    I/S –
    dep (350,000/4 X6/12)=43750
    finance cost 12500
    Non current asset 306250
    Non current liablity 175000
    current liablity 87500


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