The Managing Director of LEES Limited is considering a proposal to acquire a new, fully automatic machine to increase production capacity and efficiency. The machine would cost €150,000 to purchase outright but, because the company has insufficient resources, a lease contract has been proposed with the following terms:

1. Primary period — four years at an annual rental of €45,690 payable annually i in advance. The implicit rate of interest is 15% per annum;

2. Secondary period — unlimited and at an annual rental of €1; and 3. Cancellation — the lease may not be cancelled by LEES Limited during the primary period, but may be terminated at any time during the secondary period.

The Managing Director has been advised that the machine will have an effective useful life of six years after which time its value would be negligible. The company depreciates all machinery on a straight-line basis over their effective useful lives, commencing from the date of acquisition.

It is proposed to acquire the machine and enter into the lease on 30 November 200W, and to make the first rental payment on that date.

Requirement You are required to prepare a schedule for the Managing Director showing, in columnar form:

(a) The effect of the lease on the projected profits for each of the three years ending 31 May 200X, 200Y and 200Z; and %

(b) Extracts from the projected statement of financial position as at 31 May 200X, 200Y and 200Z, showing how LEES Limited would be required to reflect the lease and the machine.