The directors of Apple Pie plc at the September 20X5 board meeting were expressing concern about falling sales and the lack of cash to meet a dividend for the current year ending 31 December at the same rate as the previous year. They suggested to the Finance Director that:

● equipment with a book value of £40 million as at the beginning of the year and an estimated useful economic life of three years should be sold for £62.5 million;
● the £62.5 million and £40 million should be included in the sales and cost of sales for the period resulting in an improvement of £22.5 million in profit which would cover the proposed dividend;
● the equipment should then be leased back at 1 October 20X5 for the remainder of its economic life. The commercial rate of interest for a similar lease agreement had been 10%.
Required:
Draft the Finance Director’s response to their suggestion and indicate the effect on the income statement and balance sheet as at 31 December 20X5 if the lease agreement is entered into on 1 October 20X5.