How to account for finance lease by lessee

nunu_dann

Hi, I need help on as soon as possible. Thank you in advance.

On 1 January 20-5 Blenheim Ltd leases a machine from Nelson Plc. The lease is for a term of 5 years and Bleinheim Ltd is required to make lease payments of £5,000 annually in arrears. The present value of the minimum lease payments is £20,000. The machine has a use life of 7 years and would cost £22,500 if bought for cash.

Bleinheim Ltd prepares its financial statements to 31 December each year.

Prepare a brief notes for the directors of Bleinheim Ltd to answer the following:

(a) Why must the lease be classiffied as a finance lease?
(b) Explain how the lease would be accounted for in the financial statements of Blenheim Ltd, using the figures from above to
illustrate your answer if possible.

davealucas

Hi there.

In response to (a) the actual cost of the minimum lease payments and the length of the lease both cover quite substantially the actual value of the machine as well as its' useful life.


In response to (b) the lease would be accounted for as a non-current asset for the value of the lease. This would be depreciated over the life time of the lease. The lease payments would be treated as a loan within non-current liabilities, except for the next 12 months payments which would be included in current liabilities. Any lease payments over the value of the machine (not that it applies to this question) would normally be treated as interest payable within your revenue statements.

nunu_dann

Thank you so much.

pius

nice answer