On 1 July 2015, Tiger Ltd leased a PET Injection machine from Ibri City Ltd. The machine cost Ibri City Ltd $140,000 to manufacture and had a fair value of $159,109 on 1 July 2015. The lease agreement contained the following provisions:

Lease term

4 years

Annual rental payment, in advance on 1 July each year

$51,500

Residual value at end of the lease term

$15,000

Residual guaranteed by lessee

nil

Interest rate implicit in lease

8%

The lease is cancellable only with the permission of the lessor

The expected useful life of the machine is 5 years. Tiger Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $11500 to cover the costs of maintenance and insurance paid for by the lessor.

Required

Explain why the lease should be classified as a finance lease by both lessee and lessor based on the guidance provided in Accounting Standard (show all workings including lease term rate)