2. Net Ltd started trading on 1 January 2016 with share capital of £157,500.

The company needed a machine from 1 January 2016, costing £112,500. This machine has a useful economic life of 10 years with zero residual value. If the company leased the machine, annual rental would be £19,900 over 10 years, payable in arrears starting on 31 December 2016.

The company earns gross revenues of £40,500 and incurs operating costs before rental charges and depreciation of £14,960 in 2016.

The rate implicit in the finance lease is 12%.

Required

(a) Calculate the statement of comprehensive income for the year ended 31 December 2016 and the statement of financial position as at 31 December 2016 for Net Ltd if it :

(i) buys the machine;

(ii) leases the machine and treats the lease as an operating lease (in spite of IAS 17- follow the treatment for operating leases;

(iii) leases the machine and treats the lease as a finance lease.

In each case, provide calculations to show how you arrive at net current assets.

(b) Define substance over form and off balance sheet finance. Illustrate your answer in relation to finance and operating leases.