Required Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting Standard (show all workings including lease term rate)
- On 1 July 2015, Tiger Ltd leased a PET Injection machine from Ibri City Ltd. The machine cost Ibri City Ltd $140,000 to manufacture and had a fair value of $159,109 on 1 July 2015. The lease agreement contained the following provisions:
|
Lease term |
4 years |
|
Annual rental payment, in advance on 1 July each year |
$51,500 |
|
Residual value at end of the lease term |
$15,000 |
|
Residual guaranteed by lessee |
nil |
|
Interest rate implicit in lease |
8% |
|
The lease is cancellable only with the permission of the lessor |
The expected useful life of the machine is 5 years. Tiger Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $11500 to cover the costs of maintenance and insurance paid for by the lessor.
Required
Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting Standard (show all workings including lease term rate)
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