To allow students to explore in greater detail the major learning outcomes of the module and to demonstrate a detailed knowledge and understanding thereof.
Aims:
1. To allow students to explore in greater detail the major learning outcomes of the module and to demonstrate a detailed knowledge and understanding thereof.
2. To assess students` ability to
(i) appropriately summarise and structure information
(ii) evaluate relevant information from a given set of literature
(iii) understand and argue the chosen relevant information, and
(iv) present it in an appropriate written form
Assignment brief:
Bellever plc entered into a non-cancellable agreement on 1st January 2010 to lease new industrial equipment. The terms of the agreement, which may not be terminated by either party, were that Bellever will pay four annual rental payments of 30,000 in arrears with the first payment due on 31st December 2010. Bellever may retain the vehicle after the end of the primary lease term on payment of a nominal amount which is not material.
Bellever plc will bear the cost of any loss of or damage to the machine as well as all insurance and maintenance costs during the period of the lease. The equipment is new and is expected to have a useful life of 5 years after which time it is deemed to have a negligible residual value. The cash price of the equipment would have been 95,100.
Bellever plc considers this to be a finance lease. The company depreciates it property, plant and equipment using the straight line method charging a full year`s depreciation in the year of purchase. Finance charges are allocated using the interest rate implicit in the lease which is 10%.
Required
(a) Explain why Bellever believes this lease should be categorised as a finance lease. You should refer to relevant international accounting standards to justify your answer.
(b) Calculate the total finance charge, annual allocation of finance charge, annual obligation under finance lease (the annual finance lease liability) and net book value of the asset for each of the four years of the lease term.
(c) Show how the transaction would be reflected in the financial statements of Bellever plc for the year ended 31st December 2010. This should include both income statement and statement of financial position disclosures.
(d) The major issue surrounding the capitalisation of leases is one of substance over form`. Comment upon this assertion with reference to relevant international accounting standards`.
Solvent Ltd is considering expanding its business and comparing between two potential opportunities for investment in either company X or company Y.
The president of Solvent has asked the controller to prepare a report that summarises the financial aspects of the two potential investees for the last year.
The controller has presented a number of financial ratios that can assist in the identification and interpretation of trends for each investee. The following ratios have been calculated for the year ended 31st December 2012 for each company: