Lees Ltd leases an assembly machine on a finance lease. The lease requires Lees Ltd to make five rental payments of £18,000 annually in advance. The fair value of the assembly machine is £75,000 and its economic life is five years with no residual value.

The rate of interest implicit in the lease is 10.05% and it may be assumed that IAS17applies throughout the lease term.

Required:
(a) Explain why this lease is a finance lease and not an operating lease.
(b) Prepare a table showing how the finance charge in this lease would be allocated to each of the five years using each of the following methods:

(i) Straight line method.
(ii) Sum of digits ("rule of 78") method.
(iii) Actuarial method.

(c) State with reasons which of the above methods best achieves the objectives of IAS17 Leases.
(d) Show how the finance lease would be reported in the financial statements of Lees Ltd for the first and second years of the lease using the actuarial method.