CAPBS Inc. enters into a lease agreement to acquire the use of a piece of machinery for four years beginning on 1 January 2010. The lease requires four annual payments of

€28,679 starting on 1 January 2010. The useful life of the machine is four years, and its salvage value is zero. CAPBS accounts for the lease as a finance lease. The fair value of the machine is €100,000. The present value of the lease payments using the company’s discount rate of 10 percent is €100,000. (A reminder is relevant for present value calculations:

Lease payments are made at the beginning of each period.) The company uses straight-line depreciation.

1 . Comment on the appropriateness of CAPBS treating the lease agreement as a finance lease under IFRS and a capital lease under US GAAP.

2 . What is the amount reported as a leased asset on the balance sheet on 1 January 2010? What depreciation expense is reported in fiscal year 2010?

3 . What is the amount of the machinery reported as a leased asset on the balance sheet on 31 December 2010?

4 . What is the amount of the lease liability reported on the balance sheet on 1 January 2010? What interest expense is reported in fiscal year 2010?

5 . What is the amount of the lease liability reported on the balance sheet on 31 December 2010? What interest expense is reported in fiscal year 2011?

6 . If CAPBS had determined that the above lease was an operating lease, what amount of expenses would be reported on the income statements in fiscal 2010 and 2011? How does this expense compare to the expenses reported under a capital lease?