7.4 Darco Instruments plc took out a finance lease for new plant on 1 June 2015. The lease period is four years and annual lease payments, which are payable in arrears, are for £3 million per year. The purchase cost of the plant would have been £10 million. The business has a reporting year end on 31 May. The plant has a useful life of five years but the business intends to return the plant to the lessor at the end of the lease period.

Darco Instruments plc depreciates property, plant and equipment using the straightline method.

Required:

(a) Show relevant extracts from the financial statements for each of the reporting years for which the plant is leased.

(b) Show the relevant extracts from the financial statements for each year, assuming that it was an operating lease rather than a finance lease.

(c) Explain why finance charges for a finance lease are not normally allocated in equal instalments to each reporting period.