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Practice questions $3.$

Leases

The following trial balance relates to Fryatt at $31$ May $20$X$7$:

The following notes are relevant:

$(1)$ Plant and equipment is to be depreciated on the reducing balance

basis at a rate of $20\%$ per annum. The property cost includes land

at a cost of $$60,000.$ The building is depreciated over $30$ years on

a straight line basis. All depreciation is charged to cost of sales.

$(2)$ On $1$ June $20$X$6$ Fryatt commenced using an item of plant and

machinery under a lease agreement, making three annual payments

of $$29,000.$ The first payment was made on $31$ May $207$ and has

been charged to cost of sales. The present value of the minimum

lease payments is $$72,000$ and if Fryatt had purchased the plant

outright it would have cost $$78,000.$ Under the terms of the lease

Fryatt is responsible for repairing and insuring the plant and has the

option to extend the lease at a reduced rental at the end of the $3$

years. The plant has an estimated useful life of six years, with a

negligible value at the end of this period. The rate of interest implicit

in the lease is $10\%.$

$(3)$ The directors have estimated the provision for income tax for the

year to $31$ May $207$ at $$7,200.$

Required:

Prepare the statement of profit or loss for Fryatt for the year to $31$

May $20$X$7$ and a statement of financial position at that date, in a

form suitable for presentation to the shareholders and in

accordance with the requirements of International Accounting

Standards.

Theoretical questions:

Definition of leasing agreement

Substance over form concept in relation to finance lease accounting

Summary of accounting entries for accounting for lease

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