On 1 January 2003 Caps leased a new machine from ITC Finance. The cost of the machine is…

On 1 January 2003 Caps leased a new machine from ITC Finance. The cost of the machine is $100,000. The asset has an estimated useful life of five years and has a nil residual value. Under the terms of the 3-year lease, six half-yearly payments of $20,000 each are payable in advance, commencing 1 January 2003. There is a secondary two-year term available to Caps for $200 per annum. Caps have not yet decided whether or not they will take advantage of this offer. At the end of the primary term of the lease, the asset has an estimated residual value of $20,000. Caps are entitled to 95 per cent of this should the asset be sold. Requirements (a) Explain, with reasons, why the above lease should be classified as an operating or finance lease. (b) Using the sum-of-digits method of calculating implied finance charges on the lease, prepare all the relevant accounting entries to record this transaction in the financial statements of Caps Incorporated for the year ended 31 December 2003. (c) Draft extracts from the accounts for the following account categories: ● non-current assets, ● current liabilities, ● non-current liabilities.

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