Financial Accounting Theory And Practice
Q1(a) Margaret Ltd enters into a non-cancellable lease for machinery with a term of eight years. Margaret has an option to renew the lease with the same rental for a further four years even though market rentals are expected to increase with inflation over the next decade. The present value of the minimum lease payments is 70 per cent of the sum of the fair value of the plant. Is this lease an operating lease or a finance lease? Give reasons for your answer.
(b) Karri Ltd on July 1 2012 sells a tractor having a carrying amount on its books of $100,000 to Dale Ltd for $140,000 and immediately leases the tractor back under the following conditions:
? The lease term is ten years, non-cancellable, and requires rental payments of $22,784 at the end of each year.
? The estimated life of the tractor is ten years.
? There is no residual value.
? Karri Ltd pays all the executory costs (that is, these are not included in the lease payments).
? The implicit rate of interest in the lease is 10%.