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The financial accountant of Burge Ltd, a company with a 30 April year end, has contacted you with regard to acquiring some machinery on 2 May 2020. The company initially considered purchasing the machinery at a cost of £240,000 and raising the necessary funding by making a fresh issue of 40,000 ordinary £1 shares at a premium of £5.00p each. However, Burge Ltd finally decided not to purchase the machinery outright and entered into an six-year finance lease for the machinery. The lease has an implicit interest rate of 6% per annum. Burge Ltd paid a deposit of £24,000 on 2 May 2020, and the lease rentals are £42,000 per annum, payable annually in advance on 2 may each year, starting on 2 May 2020. The plant is expected to have a ten-year useful economic life.
Required:
Problem (i) Prepare extracts from Burge Ltd's financial statements for the year ended 30 April 2021 showing the effect of the lease.
Show the depreciation calculations for each year using (a) the reducing balance method with a rate of 25 per cent, (b) the straight line method.
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