nuary 2012, Main Contractors Ltd leased a new machine from the Solvitol Finance Company. The following details were obtained from the lease agreement. The capital cost of the machine at 1 January 2012 was £50,000. Six half-yearly payments of £11,000 each are payable in advance, commencing 1 January 2012 in the primary term. Three annual payments of £100 are payable in the secondary term. Main Contractors Ltd has not yet decided if it will take advantage of the secondary term. The estimated useful life of the machine is five years, with a nil r
nuary 2012, Main Contractors Ltd leased a new machine from the Solvitol Finance Company. The following details were obtained from the lease agreement. The capital cost of the machine at 1 January 2012 was £50,000. Six half-yearly payments of £11,000 each are payable in advance, commencing 1 January 2012 in the primary term. Three annual payments of £100 are payable in the secondary term. Main Contractors Ltd has not yet decided if it will take advantage of the secondary term. The estimated useful life of the machine is five years, with a nil r
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On 1 January 2012, Main Contractors Ltd leased a new machine from the Solvitol Finance Company. The following details were obtained from the lease agreement.
- The capital cost of the machine at 1 January 2012 was £50,000.
- Six half-yearly payments of £11,000 each are payable in advance, commencing 1 January 2012 in the primary term.
- Three annual payments of £100 are payable in the secondary term. Main Contractors Ltd has not yet decided if it will take advantage of the secondary term.
- The estimated useful life of the machine is five years, with a nil residual value. The estimated residual value after three years is £10,000 and, of this, 95% is accountable to Main Contractors Ltd.
- It is the policy of Main Contractors Ltd to use the
straight line method of providing fordepreciation .
Using (a) the sum of the digits method and (b) the actuarial method, calculate the effect of this rental on the annual accounts of Main Contractors Ltd to 31 December for the relevant years to allocate finance charges under the following headings:
(i) lease creditor
(ii) finance charge
(iii) depreciation, and
(iv) net book value of asset
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