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On 1^st April 2010 Forest plc had a stock of cut seasoning timber which had cost 12 million two years ago. Due to a shortage of this quality of timber its value at 1^st April 2010 had risen to 20 million. It will be a further three years before this timber is sold to a manufacturer of high-class furniture. On 1^st April 2010 Forest plc entered into an arrangement to sell Barret Bank the timber for 15 million. Forest plc has an option to buy back the timber at any time within the next three years at a cost of 15 million plus accumulated interest at 2% per annum above base rate. This will be charged from the date of the original sale. The base rate for the period of the transactions is expected to be 8%. Forest plc intends to buy back the timber on 31^st March 2013 and sell it the same day for an expected price of 25 million.

Ignore any storage costs and capitalisation of interest.

Required

Assuming the above transactions take place as expected, prepare extracts to reflect the transactions in the income statements for the years to 31^st March 2011, 2012 and 2013 and the balance sheets at those year ends:

i) If Forest plc treats the transactions in their legal form

ii) If the substance of the transactions is recorded

Comment briefly on your answer.

On 1 July 2007 Sadex had entered into two leasing contracts, effective from that date, details of which are as follows:

Contract 1

An operating lease for mobile lifting equipment for use in the finished goods warehouse, at an annual rental of 45,000 payable in advance, for a period of six years.

Contract 2

A finance lease for plant, at an annual rental of 208,000 payable in advance, for a period of five years. The initial fair value of the plant was 800,000. Depreciation is provided at the rate of 20% per annum on a straight line basis, assuming no residual value. The interest rate implicit in the lease is 15.15%

Required

Show how the two leases would be reflected in the financial statements of Sadex for the years ended 30 June 2008 and 2009. Notes to the accounts are not required.

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