King Tours is considering the purchase of a mini-bus for R550 000. King Tours has the option to buy the mini-bus in cash or to lease. The lease will be a five-year lease and it will require a down payment of R150 000 and further payments of R100 000 per year. If the mini-bus is owned, the service and maintenance charges will be R20 000 per annum but if the mini-bus is leased, this charge is carried by the lessor. The residual value of the mini-bus in five years' time is expected to be R50 000. King Tours uses the straight-line method of depreciation. The tax rate is 30% and the after-tax cost of debt is 10% 4.1 Calculate the cost of owing against the cost of leasing and advise on the best option for King Tours. Justify your answer. (20) 4.2 Discuss the five tests which are considered in IAS 17 to determine whether a lease is a finance lease. (5)
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