Reference no: EM132740349

Question - The Mission Company Ltd, whose year-end is 31 December, has acquired two items of machinery on leases, the conditions of which are as follows:

Item Y: Ten annual instalments of £20,000 each, the first payable on 1 January 20X0. The machine was completely installed and first operated on 1 January 20X0 and its purchase price on that date was £160,000. The machine has an estimated useful life of ten years, at the end of which it will be of no value.

Item Z: Ten annual instalments of £30,000 each, the first payable on 1 January 20X2. The machine was completely installed and first operated on 1 January 20X2 and its purchase price on that date was £234,000. The machine has an estimated useful life and is used for 12 years, at the end of which it will be of no value.

The Mission Company Ltd accounts for finance charges on finance leases by allocating them over the period of the lease on the sum of the digits method.

Depreciation is charged on a straight-line basis. Ignore taxation.

Required -

(a) Calculate and state the charges to the statement of comprehensive income for 20X6 and 20X7 if the leases were treated as operating leases.

(b) Calculate and state the charges to the statement of comprehensive income for 20X6 and 20X7 if the leases were treated as finance lease and capitalized using the sum of the digits method for the finance charges.

(c) Show how items Y and Z should be incorporated in the statement of financial position, and notes thereto, at 31 December 20X7, if capitalized.