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Chapter 6

Example 6.1

Greasy entered into a five year lease on 1 January 20X0 for a machine with a
fair value of $4 million. The lease contract requires the annual payment of
st
$1,000,000 starting on 31 December 20X0. The machine has a useful
economic life of five years. The interest implicit in the lease is 7.93%.

Required

(i) Prepare extracts from Greasy’s financial statements for the year
ended 31 December 20X0 showing the impact of the lease
arrangement.

(ii) Prepare the same extracts now assuming that the lease repayments
were paid in advance (on 1 January each year). The interest implicit
in the lease is 12.59%.

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