Question 1

(a) IAS 17 provides guidance on how leasing transactions should be accounted for in published
financial statements. The standard classifies a lease as either a finance lease or an
operating lease.

Required:

(i) Explain the differences between a finance and an operating lease.

(5 marks)
(ii) Explain how each type of lease should be accounted for in the financial statements
of the lessee.
(5 marks)

(b) Leasy Ltd entered into a ten year lease for a large piece of machinery on 1 January 2015.
The cash price of the machinery on that date was €500,000 and it has an expected useful
life of ten years. Lease rental payments are €60,000 per annum, payable in advance,
commencing on 1 January 2015. The rate of interest applicable to this lease is 6% and the
auditors have confirmed it is a finance lease.

Required:

Prepare calculations showing all relevant numbers that will appear in the Income Statement
and Statement of Financial Position for the above arrangement for the year ended 31
December 2015.
(5 marks)

(Total 15 marks)

Question 2

(a) IAS 17 provides guidance on how leasing transactions should be accounted for in published
financial statements. The standard classifies a lease as either a finance lease or an
operating lease.

Required:

Explain the differences between a finance and an operating lease.

(5 marks)

(b) Opera Ltd has entered into a lease on a piece of stage equipment for a show that will run
for three months starting on 1 December 2016. The cash price of the equipment is €50,000
and it has a useful life of five years. The lease rental for the entire three months is €3,000
payable in advance. The company year-end is 31 December 2016.
 Required:

Explain with reasons, whether this is an operating or finance lease and show how it should
be accounted for in the financial statements of Opera Ltd at 31 December 2016.
(5 marks)

(c) Opera Ltd also entered into a seven year lease for a large piece of stage equipment on 1
January 2016. The cash price of the equipment on that date was €300,000 and it has an
expected useful life of seven years. Lease rental payments are €45,000 per annum, payable
in advance, commencing on 1 January 2016. The rate of interest applicable to this lease is
8% and the auditors have confirmed it is a finance lease.

Required:

Prepare calculations showing all relevant numbers that will appear in the Income Statement
and Statement of Financial Position for the above arrangement for the year ended 31
December 2016.
(5 marks)

(Total 15 marks)