1. Company A leases a motor vehicle from Company B.

The lease became effective 1 January 20X4 and the lease term is for 4 years.

The annual lease payments are 10000 per annum.

There is no option of renewal (of the lease agreement).

The implicit interest rate is 10%.

The fair value of the motor vehicle at 1 January 20X4 is 31700.

Required:

For each of the scenarios below, discuss whether or not the above lease agreement constitutes a finance lease:

Scenario 1: The useful life of the motor vehicle is 8 years. At the end of the lease period, ownership of the motor vehicle transfers from Company B to Company A.

Scenario 2: The useful life of the motor vehicle is 4 years. At the end of the lease period, ownership of the motor vehicle remains with Company B.

Scenario 3: Ignore the above information: Payments are 5000 for 3 years in arrears, there is no option of renewal, fair value of the machine was 40000 and the interest rate implicit is 10%. The useful life of the vehicle is 8 years.