Accounting for lease by lessor Refer to P11.8. Consider the proposed lease of the van from the point of view of Polease, the lessor.

The van cost Polease 32,000. Its estimated residual value at the end of the five years is zero. The company has a 31 December financial year-end.

Required

(a) What is the effect of the lease on Polease’s accounts at the start of x2 when the contract is signed if the lease is:

(i) an operating lease?

(ii) a sales-type lease?

(b) How should Polease account for the lease in its x2 and x3 accounts (income statement and endyear balance sheet) if the lease is:

(i) an operating lease?

(ii) a sales-type lease?

(c) Assume now that Polease estimates the van – which Dogberry is to hand back at the end of the five-year lease term – will have a residual value of 4,000 then. The residual value is not guaranteed by either Dogberry or a third party. (The annual lease payment remains at 10,000. The van’s initial fair value is still 39,925.)

Explain in general terms how this additional information alters your answers to

(a) and

(b) above?

(You need not make any fresh calculations.)

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