(i) Different accounting practices for leases are an area that, without a robust accounting standard, can be used to manipulate a company's financial statements. IAS 17, Leases, was revised in 1999 and has as its objective to prescribe the appropriate accounting policies and disclosures for financial and operating leases.
Required:
Summarize the effect on the financial statements of a lessee treating a lease as an operating lease as opposed to a finance lease, and describe the factors that normally indicate a lease is a finance lease.
(ii) Gemini leased an item of plant on 1 April 20X1 for a five-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 reducing balance.
Required:
Assuming the lease is a finance lease and the interest rate implicit in the lease is 8%, prepare extracts of the financial statements of Gemini for the year to 31 March 20X3.