Bertie prepares financial statements to 31 December each year. On 1 January 20X1 Bertie purchased…
Bertie prepares financial statements to 31 December each year. On 1 January 20X1 Bertie purchased a machine for £200,000 and immediately leased the machine to Carter. The lease term was five years – equal to the expected useful life of the asset. Bertie estimated that the residual value of the asset at the end of the lease would be £2,000, and incurred initial direct costs of £1,500 in arranging the lease. Carter agreed to pay rentals of £50,000 per annum in arrears to lease the asset from Bertie.
(a) Compute the rate of interest implicit in the lease by Bertie to Carter.
(b) Show how the arrangement will be reported in the financial statements of Bertie for the year ended 31 December 20X1. You should show the split of any relevant assets into their current and non-current portions.