Ballina plc is a marketing agency and has a financial year-end on 31 December. Recently, it has entered into two leasing agreements:

On 1 May 2017, Ballina plc leased a professional scanner from Htech Rent for twelve months. The scanner has a market value of £1,200 with an estimated useful life of four years. Under this lease, Ballina plc will make payments of £50 at the end of each month. Htech Rent will be responsible for repair and maintenance of the scanner. The lease agreement can be terminated by either party giving a one-month period of notice.    

On 1 July 2017, Ballina has entered into a non-cancellable agreement with Euro Bank to lease a photocopy machine that has an estimated life of four years. The lease period is for three years and at the end of the lease period the machine will be returned to Euro Bank. The photocopy machine is expected to have a nil residual value at the end of its life. Under the terms of the lease, Ballina plc agreed to pay £6,000 on a half-yearly basis commencing on 31 December 2017. Ballina plc is required to pay for all maintenance and insurance costs relating to the machine.

The interest rate implicit in the lease is 5% per half year. Ballina plc uses straight-line depreciation applied on a strict time basis. The fair value of the machine on 1 January 2017 was £32,000.

Required:

1. Prepare extracts of Ballina plc’s Statement of Comprehensive Income and Statement of Financial Position for the years ended 31 December 2017 to 2019 in compliance with the extant accounting standards.

Show all your workings. State any assumptions that you make. The accounting policy notes and disclosure notes are not required.

2. Discuss to what extent you believe that it is necessary to apply ‘substance’ to lease contracts.