On 30 June 2017 Amco Ltd leases equipment from Leasing Solutions Ltd. The lease term is four years; the useful life is estimated to be six years with no residual expected at the end of the period. Amco guarantees the residual value of $32, 000. At the inception of the lease the fair value of the asset is $199,173.7. The lease requires equal annual payments of $43,000, in advance, on 30 June each year. Amco pays all executor costs directly to third parties. The implicit interest rate of the lease is 10%. Title does not transfer at the end of the lease term and Amco expects to return the asset to Leasing Solutions. The lease is cancellable but incurs a penalty of two years rental payments.

Required:

Using the guidelines of economic life and fair value of asset provided in AASB 117 classify the lease as an operating or finance lease from the perspective of the lessee.

10:25 AM ... alll 89 AASB117 07-04 C... Q I AM AGAINST RAPE ! #ProtectGirls #RespectGirls #SayNoToRape Hang TheRapist IMPLEMENTATION GUIDANCE This guidance accompanies, but is not part of, AASB 117. Illustrative Examples of Sale and Leaseback Transactions that Result in Operating Leases A sale and leaseback transaction that results in an operating lease may give rise to profit or a loss, the determination and treatment of which depends on the leased asset's carrying amount, fair value and selling price. The table below shows the requirements of the Standard in various circumstances. Sale price at fair value Carrying paragraph 61) Carrying amount equal to fair value amount less than Carrying fair value amount above fair value Profit no profit recognise profit not applicable immediately Loss no loss not applicable recognise loss immediately Sale price below fair Carrying Carrying Carrying value (paragraph 61) amount equal to fair value amount less than amount above fair value fair value Profit no profit recognise profit no profit immediately (note 1) Loss not compensated recognise loss for by future lease recognise loss (note 1) immediately immediately payments at below market price Loss compensated for defer and amortise defer and amortise (note 1) by future lease loss loss payments at below market price AASB 117-compiled 26 IMPLEMENTATION Sale price above fair Carrying Carrying value (paragraph 61) amount equal to amount less than Carrying fair value fair value amount above fair value Profit defer and amortise defer and amortise defer and amortise profit excess of sale price profit over fair value (note 2) recognise any excess of fair value over carrying amount immediately (note 3) Loss no loss no loss (note 1) Note 1 These parts of the table represent circumstances dealt with in paragraph 63 of the Standard. Paragraph 63 requires the carrying amount of an asset to be written down to fair value where it is subject to a sale and leaseback. Note 2 Profit is the difference between fair value and sale price because the carrying amount would have been written down to fair value in accordance with paragraph 63. Note 3 The excess profit (the excess of sale price over fair value) is deferred and amortised over the period for which the asset is expected to be used. Any excess of fair value over the carrying amount is recognised immediately