Ms. Deborah Lam, CEO of SGL, returned from an annual visit on 1/1/2017 with the company's banker to present SGL's financial statements. The banker expressed concern over SGL's profitability and debt level. In an effort to alleviate the banker's con- cerns, Ms. Lam proposed to sell a major piece of production equipment to an international finance company, provided SGL is able to lease it back. The equipment purchased two years ago for $1,000,000 and depreciated at 15% per year on a reducing-balance basis. Ms. Lam estimates that the machinery is currently worth $1,500,000 at fair value.

She has approached Mr. Alan Fin, President of Shark's Finance Services Ltd, who indicated that he would be willing to purchase the equipment for $1,800,000 and lease it back to SGL for $274,252 per year for the next 10 years, payable at the end of each financial year (i.e. 31 March). The sale satisfies HKFRS 15 "Revenue from Contracts with Customers", however, the finance director of SGL insisted to account for it as a financing arrangement but the evidence does not support her claim.

Contract inception date is 1 April 2017 and the first lease rental is paid and charged to the statement of profit or loss on the contract inception (on 1 April 2017) as rental expense. The sales proceed was treated as a financial liability at date of sales (also on 1 April 2017). The incremental borrowing rate is 12% per annum.

Explain the required financial reporting requirement of the issue above in the financial statements for the year ended 31 March 2018 of SGL in accordance with relevant IFRS, preparing all relevant calculations and setting out the required adjustments in the form of journal entries.

1)The transaction should be accounted for as real sale. The question stated that the rental payment of $274252 is payable at the end of each financial year (31/3). But the first lease rental is paid and charged to the statement of profit or loss on 1/4/2017. Should i record the first payment (Cr bank) on 1/4/2017? But the debit side is what (Dr prepaid?)

2) should i record the difference of the depreciation under the two approach ( treat as sale and financing)?

3) what is depreciation of the equipment under the situation of transfer as financing? What is the useful life of the equipment?