Accounting by lessee  LO3 Max Ltd prepares the following lease payments schedule for the lease of a machine from Payne Ltd. The machine has an economic life of 6 years. The lease agreement requires four annual payments of $33 000, and the machine will be returned to Payne Ltd at the end of the lease term. MAX LTD Lease payments schedule Lease payments Interest expense (10%) Reduction in liability Balance of liability 1 July 2018 $98 512 1 July 2019 $ 30 000 $ 9851 $20 149 78 363 1 July 2020 30 000 7836 22 164 56 199 1 July 2021 30 000 5620 24 380 31 819 1 July 2022 35 000 3181 31 819 — $125 000 $26 488 $98 512 Required The following three multiple‐choice questions relate to the information provided above. Select the correct answer and show any workings required. 1. For the year ended 30 June 2019, what would Max Ltd record in relation to the lease?

(a) An interest payable of $26 488

(b) An interest payable of $nil

(c) An interest payable of $9851

(d) An interest payable of $7836 2. How much annual depreciation expense would Max Ltd record?

(a) $24 628

(b) $16 419

(c) $15 585

(d) $23 378 3. If Payne Ltd (the lessor) records a lease receivable of $102 327, the variance between this receivable and the liability of $98 512 recorded by Max Ltd could be due to what?

(a) Initial direct costs paid by Payne Ltd

(b) An unguaranteed residual value

(c) Both of the above

(d) Neither of the above