Q1.

(a) Bayswater plc entered into a finance lease on 1 June 2013 for a machine. The lease involves paying five annual rental payments of 38,000 starting on 31 May 2014. The machine is depreciated over five years using the straight-line method. At the end of its life the machine is expected to have a residual value equal to 15% of its original fair value. The implicit rate of interest is 6%. Note: When n = 5, at interest rate = 6%, the annuity factor is 4.212.

(b) During the period 1 September 2013 28 February 2014 Bayswater hired a lorry at a cost of 900 per month. The cost of the lorry was 100,000 and has a remaining useful life of 10 years. It is expected that it will have a residual value of 10,000 at the end of the period.

Required:

Show how the above transactions would be reported in the statement of profit or loss and statement of financial position of Bayswater plc for the years ended 31 May 2014 and 31 May 2015

Q2.

A company received a government grant of 25% towards the purchase of the cost of a machine costing 120,000 during the year ended 31 March 2014. The plants residual value was 20,000 and has an estimated useful life of four years.

Required:

Explain and show how the government grant will be treated in the financial statements if the grant is treated as deferred income.