Question
Kapiti Ltd runs a successful chain of fashion boutiques, but has been experiencing significant cash flow problems. The directors are examining a proposal made by
Kapiti Ltd runs a successful chain of fashion boutiques, but has been experiencing significant cash flow problems. The directors are examining a proposal made by an accounting consultant that all the shops currently owned by the company be sold and either leased back or the businesses moved to alternative leased shops. The directors are keen on the plan but are puzzled by the consultants insistence that all lease agreements for the shops be operating rather than finance leases.
Meanwhile, Scarlett Ltd agreed to lease their 5 buildings to KapitiLtd.
The lease agreement details are as follows:
Length of lease | 10 years |
Commencement date | 1 July 2020 |
Annual lease payment, payable 1 July each year commencing 1 July 2020 ($120000 x 5) | $600 000 |
Estimated economic life of the building | 10 years |
Annual Interest rate implicit in the lease | 10% |
The Chairman of the Board directed the Company Accountant to submit a detailed report on the above project.
Required
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