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F2: Advanced Financial Reporting

CHAPTER 6 – LEASES

6.1 Which of the following lease arrangements does not meet the definition as
a finance lease?

A JS leases a machine over a 5 year lease term. Rental payments are made
in advance for $50,000 from 1st December 20X5. The economic lifetime of
the asset is 7 years.

B JS leases a building for a 10 year period. The FV of the asset to be
purchased outright is $212,400 which is equal to the PV of the minimum
lease payments.

C JS leases land for a lease term of 50 years. The ownership of the land is
retained by the lessor at the end of the lease term.

D JS leases a vehicle on a 5 year lease term. The economic lifetime of the
car is 10 years. At the end of the lease term, the lessee has the option to
continue the rental with a nominal rental payment.

6.2 Bunny plc has 2 options for the purchase of a new machine with an
estimated useful economic lifetime of 6 years. It can buy it today, the 1st
January 20X3 at a cash price of $100,000 or it can lease the asset under
the following agreement:

 A deposit of $13,760 will be payable straight away

 5 annual payments of $20,000 will be due, beginning on 1st Jan 20X3

 The interest rate implicit in the lease is 8%.

 The present value of the minimum lease payments is equal to the fair
value of the machine.

If Bunny decides to lease the asset, what will be recorded in its financial
statements at the y/e 31 December 20X4 for the following figures?

Finance cost Non-current liability Current liability

A 4,123 35,662 20,000

B 5,299 51,539 20,000

C 5,312 51,712 20,000

D 5,851 43,709 15,281

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