A machine has a useful life of 4 years and a cash value of €12,000.Company A leases the machine for €300 per month in advance and the lease is cancellable.Company B leases the machine for 8 half yearly payments in advance of €2,250.Company C leases the machine for 6 half yearly payments in advance of €1,800.Company D leases the machine for 4 half yearly payments in advance of €1,250.Which of these should be classified as a finance lease?
A)Company A
B)Company B
C)Company C
D)Company D

Question

Quizplus · Accepted Answer

According to IAS 17, a lease is considered a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset. In this case, only Company B pays a total of €18,000 (8 half-yearly payments of €2,250) which is equal to the cash value of the machine. This indicates that Company B is committed to paying the entire value of the asset, and therefore, it is classified as a finance lease. Companies A, C, and D pay less than the cash value and have cancellable lease agreements, indicating that they do not assume the risks and rewards incidental to ownership and are therefore operating leases.

A Machine Has a Useful Life of 4 Years and a Cash