On 1 January 2020, Lessor plc leases a machine to Lessee Ltd. The lease term is three years and lease payments of £1,000 per month are required. The machine has a useful life of eight years and its fair value at 1 January 2020 is £50,000.

(a) Explain why this lease is an operating lease.

On 1 October 2019, Conston Ltd (which prepares accounts to 30 September) leases an asset to a lessee. The lease term is five years and the lessee is required to make lease payments of £27,500 each on 1 October 2019, 2020, 2021, 2022 and 2023. The fair value of the asset on 1 October 2019 is £112,500. Conston Ltd incurs initial direct costs of £430 and the rate of interest implicit in the lease is 12.5%.

At the end of the lease term, ownership of the asset will remain with Conston Ltd, by which time the asset is expected to have come to the end of its economic life and to have a scrap value of £5,000.

Required:
(a) Explain why this lease is a finance lease and not an operating lease.
(b) Calculate the net investment in the lease at commencement.
(c) Calculate the finance income which should be recognised in the financial statements of Conston Ltd for each of the five years of the lease term.(b) Explain how the machine itself and the lease payments should be dealt with in the financial statements of Lessor plc, assuming that the company prepares accounts to 30 June each year.