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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 company’s return on capital employed. Required: 1. 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 any entity’s financial statements. 2. Prepare extracts of Fino’s 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).

the extracts of the income statement. (8 marks) Gabby.1. The agreed fair value of the asset is RM139.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. Required: (i) (ii) (iii) Calculate the interest charges using the actuarial method for the whole duration of the lease period Show. the extracts of the income statement. 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. At the end of the lease period the title to the asset is transferred to the lessee. The interest rate implicit in the lease is 10%. leases a plant from Kana on 1. balance sheet and the notes to the accounts for the year 2002 Show. which prepare its account to 31 December each year.475. in the books of the lessee.2002 on the following terms: • • • Gabby is to pay RM40.000 immediately. in the books of the lessor.1. balance sheet and the notes to the accounts for the year 2002 (17 marks) (Total: 25 marks) . with 3 further installments of RM40.000 each year beginning on 1.2003.