Q1 Gemini plc. A change in company policy during the previous year has meant that Gemini plc leases manufacturing equipment instead of buying it. However, some directors are not aware of the contents of international financial reporting standards on leases, and are considering treating all lease payments as expenses in the profit and loss account. You have recently been appointed as finance director to a manufacturing company, You are reviewing the draft financial statements with the accountant who provides the following information regarding the following lease transaction: Gemini plc leased an item of equipment on 1 April 20x1 for a 5-year period. Annual rentals in advance were £60,000. The cash price (fair value) of the asset on 1 April 20x1 was £260,000. The company's depreciation policy for this type of plant is 25% per annum on the straight-line basis. The interest rate implicit in the lease is 8%. Note: the annuity factor for 8% interest for 4 years is 3.31. REQUIRED: Advise other directors whether this lease agreement represents a finance lease or an operating lease in accordance with international financial reporting standards (show your workings); (b) Prepare the income statement and balance sheet extracts of Gemini plc for the year to 31 March 20X6, in accordance with IFRS 16. (c) Explain the differences between a finance lease and an operating lease.
Q1 Gemini plc. A change in company policy during the previous year has meant that Gemini plc leases manufacturing equipment instead of buying it. However, some directors are not aware of the contents of international financial reporting standards on leases, and are considering treating all lease payments as expenses in the profit and loss account. You have recently been appointed as finance director to a manufacturing company, You are reviewing the draft financial statements with the accountant who provides the following information regarding the following lease transaction: Gemini plc leased an item of equipment on 1 April 20x1 for a 5-year period. Annual rentals in advance were £60,000. The cash price (fair value) of the asset on 1 April 20x1 was £260,000. The company's depreciation policy for this type of plant is 25% per annum on the straight-line basis. The interest rate implicit in the lease is 8%. Note: the annuity factor for 8% interest for 4 years is 3.31. REQUIRED: Advise other directors whether this lease agreement represents a finance lease or an operating lease in accordance with international financial reporting standards (show your workings); (b) Prepare the income statement and balance sheet extracts of Gemini plc for the year to 31 March 20X6, in accordance with IFRS 16. (c) Explain the differences between a finance lease and an operating lease.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Do answer all the subparts a,b,c.if Answered within 30mins,it would be appreciable!!!
Transcribed Image Text:You have recently been appointed as finance director to a manufacturing company,
Q1
Gemini plc. A change in company policy during the previous year has meant that Gemini plc
leases manufacturing equipment instead of buying it. However, some directors are not aware
of the contents of international financial reporting standards on leases, and are considering
treating all lease payments as expenses in the profit and loss account.
You are reviewing the draft financial statements with the accountant who provides the
following information regarding the following lease transaction:
Gemini plc leased an item of equipment on 1 April 20x1 for a 5-year period. Annual rentals in
advance were £60,000. The cash price (fair value) of the asset on 1 April 20x1 was £260,000.
The company's depreciation policy for this type of plant is 25% per annum on the straight-line
basis. The interest rate implicit in the lease is 8%.
Note: the annuity factor for 8% interest for 4 years is 3.31.
REQUIRED:
(a)
Advise other directors whether this lease agreement represents a finance lease or
an operating lease in accordance with international financial reporting standards
(show your workings);
(b)
Prepare the income statement and balance sheet extracts of Gemini plc for the
year to 31 March 20X6, in accordance with IFRS 16.
(c)
Explain the differences between a finance lease and an operating lease.
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