Question $5$

$(20$ marks: $36$ marks$)$

Steve and Sons Leasing Company$/$specializes in leasing out bulldozers to construction

companies. A construction company, Rio's Construction, needs a bulldozer to complete a

project and has approached Steve and Sons Leasing Company for a potential lease

agreement. A brand$-$new bulldozer retails for R$2,500,000,$ but Rio's Construction has opted

to lease the bulldozer instead to preserve its cash flow for other projects.

On $1$ July $2022,$ Steve and Sons Leasing Company and Rio's Construction entered into a

lease agreement for the use of a bulldozer for a period of three years. The lease agreement

states that Rio's Construction will pay R $400,000$ per annum, payable annually in arrears. The

agreement does not include an option for Rio's Construction to purchase the bulldozer at the

end of the lease.

The bulldozer was purchased by Steve and Sons Leasing Company on $1$ July $2022$ has a

useful life of $10$ years. Steve and Sons Leasing Company expects the bulldozer to be returned

to them at the end of the lease in good condition.

You may assume that an incremental borrowing rate of $10\%$ is applicable to Rio's

Construction.

You are required to:

Discuss how the lease should be classified at inception of the contract in Steve and Sons

Leasing Company's books. Ensure that your discussion addresses all facts and circumstances

that should be considered by Steve and Sons Leasing Company at inception of the lease.

$(18$ marks$)$

Presentation

$(2$ marks$)$