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Case Study: IAS 17 para-graph 13 states that "Lease classification is made at the inception of the lease......"
Sishi Ltd entered into a lease agreement in terms of which a machine with a fair value of R250 450 was acquired in exchange for five annual lease payments of R69 600 in arrears. In addition, Sishi Ltd will pay R20 000 at the end of year 5 to take ownership of the machine. The machine is expected to have a total useful life of 5 years. The interest rate implicit in the lease is 13.82% p.a. This is the rate that discounts the future minimum lease payments of R69 600 and the guaranteed payment of R20 000 at the end of year 5 to equal to the fair value of R250 450.
REQUIRED:
1 What class of lease is this (Finance OR Operating)? Support your answer.
2 Prepare the journal entries to account for the lease in the books of Sishi Ltd NOTE: For annual lease payments on the first year journal is required Show all workings
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