7.2 On 1 January 2016, Markon plc took out a finance lease for new plant. Details of the lease are as follows:

The business has a reporting-year-end date of 31 December. The minimum lease payments are the four annual lease payments. The implicit interest rate in the lease is 12 per cent per year.

Required:

(a) Calculate the present value of the minimum lease payments as at the commencement of the lease. (Refer to the appendix to the chapter to answer this part of the question.)

(b) Explain why the lower, rather than the higher, of the fair value of the leased asset and the minimum lease payments should be used for initial recognition of the lease.