Assignment related questions on Lease

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Virtual University of Pakistan suddenly needs a broadcasting equipment to efficiently manage the broadcasting services of one of its video channel “VTV4”. For this purpose, it has entered into a four year lease agreement for the equipment with Askari Leasing Limited. The lease agreement has duly signed by both organizations on following terms

1. Annual lease rentals will be Rs.150,000 for primary period and will be paid in advance.
2. Rentals for optional secondary period of three years will be 80%, 60% and 40% of the annual rental in the primary period.
3. It is also agreed that these rentals will represent a fair commercial rate.
4. Useful life of machine is estimated to eight years with a cash value of Rs.600, 000.

You are required to identify whether this lease agreement be a finance lease or an operating lease?



Question No. 2
Part (a)
Marks = 4
PSO (Pakistan State Oil) Limited entered into a four year lease agreement with EFU Leasing (pvt.) Limited on 1st January, 2005 for oil purify machine with a fair value of Rs.69,555.
Annual rental is agreed on Rs. 21,000 starting from 31st Dec, 2005. PSO Limited is responsible for insurance and maintenance charges. The rate of interest implicit in the lease is 8% p.a.

You are required to show the allocation of the finance charges and principle amount over the lease term?

Part (b)
Marks = 2
Calculate the non-current liability for the above finance lease at 31st
Dec, 2005?

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