DelPo Ltd is a construction company specialising in the construction bungalow and camping structures. DelPo Ltd prepares its financial statements to the 31 July each year. Their operations have grown substantially over the last year, and as such, DelPo required the use of more machinery to help build the structures. They entered into an agreement this year as follows: Agreement - Machinery On 1 August 20X5 DelPo have obtained the use of a special machinery from Davis Ltd for the next 9 years, paying annual rentals of £8,200 in arrears. Machineries of this type usually cost £47,000 to purchase outright and generally last for 9 years before replacement. The present value of the minimum lease payments is £49,159. The rate implicit within the lease is 9%. Required a. Explain the concept of substance over form in reference to IFRS 16 Leases. b. Explain the accounting treatment in the year ended 31 July 20X6 for the lease agreement above giving also journal entries.
DelPo Ltd is a construction company specialising in the construction bungalow and camping structures. DelPo Ltd prepares its financial statements to the 31 July each year. Their operations have grown substantially over the last year, and as such, DelPo required the use of more machinery to help build the structures. They entered into an agreement this year as follows: Agreement - Machinery On 1 August 20X5 DelPo have obtained the use of a special machinery from Davis Ltd for the next 9 years, paying annual rentals of £8,200 in arrears. Machineries of this type usually cost £47,000 to purchase outright and generally last for 9 years before replacement. The present value of the minimum lease payments is £49,159. The rate implicit within the lease is 9%. Required a. Explain the concept of substance over form in reference to IFRS 16 Leases. b. Explain the accounting treatment in the year ended 31 July 20X6 for the lease agreement above giving also journal entries.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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DelPo Ltd is a construction company specialising in the
construction bungalow and camping structures. DelPo Ltd
prepares its financial statements to the 31 July each year.
Their operations have grown substantially over the last year,
and as such, DelPo required the use of more machinery to help
build the structures. They entered into an agreement this year as
follows:
Agreement - Machinery
On 1 August 20X5 DelPo have obtained the use of a special
machinery from Davis Ltd for the next 9 years, paying annual
rentals of £8,200 in arrears. Machineries of this type
cost £47,000 to purchase outright and generally last for 9 years
before replacement. The present value of the minimum lease
payments is £49,159. The rate implicit within the lease is 9%.
Required
a. Explain the concept of substance over form in reference to
IFRS 16 Leases.
b. Explain the accounting treatment in the year ended 31 July
20X6 for the lease agreement above giving also journal entries.
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