On 1 January 20X7 Baldwin Brothers entered into a five-year lease of equipment at an annual rental of £39,000 payable in arrears. The interest rate associated with this transaction is 10% and Baldwin Brothers incurred direct costs of £2,700 in setting up the lease. The fair value of the equipment at 1 January 20X7 was £175,000 and its remaining useful economic life at that date was estimated to be eight years.
Required:
Show the relevant amounts that would appear in the financial statements of Baldwin Brothers for the year ended 31 December 20X7 under the following two assumptions:
(1) The lease is accounted for under IAS 17.
(2) The lease is accounted for as a Type A lease under the proposals in the 2013 exposure draft.