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Q1. Jack plc entered into a non-cancellable lease agreement for an item of machine on the following
terms:
Fair value of the machine: €10,000
Lease term: 5 years
Five annual rentals payable in advance of €2,100
Lessor’s unguaranteed estimated residual value at the end of five years: €1,000
Implicit interest rate in the lease: 6.62% per annum
Commencement date: 1 Jan 2018
Lessee’s financial year-end: 31 December
Note: the present value of an ordinary annuity of €1 per year for 4 years at 6.62%
interest is
€3.42.
REQUIRED:
(a) Determine whether this lease represents a finance lease or an operating lease in accordance
with IFRS 16 (show all your workings);
(b) Prepare the income statement and
December 2018 to 2022.
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