4 (Part a & b are independent scenarios) Part a On 1 April 2021, VWX Corporation Ltd (VWX) began to lease a machine. The lease term was for five years. The lease does not transfer ownership of the machine to VWX at the end of the lease term. Other relevant information as follows: i. The estimated useful life of the machine at 1 April 2021 was 20 years. ii. 111. iv. Rentals payable by VWX for the use of the machine were $2 million per annum, payable annually at the end of year (i.c. in arrear). The rate of interest implicit in this lease is 7% per annum for the lessor, this rate is known by lessee. The present value of $1 payable for five years annually in arrears (ordinary annuity) at a discount rate of 7% is $4.10. Required: In relation to the lease of machine in the books of VWX, 1. Prepare the journal entries to record the relevant transactions till 31 March 2022 (8 marks) 2. Prepare the extract of the statement of financial position of VWX Corporation Ltd at 31 March 2022. (6 marks) (All workings must be shown, marks were granted to amortization table, prepare all your answer in thousand dollars) Part b Assume that on January 1, 2022, YZA Corporation (YZA) sells equipment to Pioneer Finance Co. for $1,700,000 and immediately leases back the equipment. The relevant information is as follows. 1. The equipment was carried on YZA Ltd books at a value of $1,500,000. 2. The term of the non-cancelable lease is 3 years; title will not transfer to YZA. 3. The lease agreement requires equal rental payments of $277,635 at the beginning of each year. 4. The incremental borrowing rate for YZA is 7%. YZA is aware that Pioneer Finance Co sets the annual rental to ensure a rate of return of 7%. 5. The equipment has a fair value of $1,700,000 on January 1, 2022, and an estimated economic life of 10 years. Required Prepare the journal entries for the Pioneer Finance Co. for 2022 to reflect the sale and leaseback agreement. (10 marks) Part c Recording the substance of transactions, rather than their legal form, is an important principle in financial accounting. Abuse of this principle can lead to profit manipulation, non-recognition of assets and substantial debt not being recorded on the financial statement. Required: Describe ANY TWO arguments how the use of off balance sheet financing can mislead users of financial statements. (6 marks) (Total: 30 marks)