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In: Accounting

On 1 July 2015, Tiger Ltd leased a PET Injection machine from Ibri City Ltd. The...

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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ekkarill92 answered 2 years ago
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