Calculate the cost of 8,000 units sold in the month and the value of inventory at month end, using…

Finance lease or operating lease?

As from Jan 01, 01 entity E leases a machine. The lease term is four years. The economic life (IAS 17.4) and the useful life (IAS 17.4) of the machine are six years. At the end of each year, a minimum lease payment of CU 1 has to be made. There is no purchase option and no transfer of ownership by the end of the lease term. The machine is a standardized product that is also used by E"s competitors. It is not practicable for E to determine the interest rate implicit in the lease. E"s incremental borrowing rate is 9% p.a. The fair value of the machine as at Jan 01, 01 is CU 3.

Required

Assess whether each of the criteria in IAS 17.10 indicates that the lease has to be treated as a finance lease in E"s financial statements. Assume that apart from IAS 17.10, no further criteria are relevant for the assessment in this example.

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