On 1 July 2017, Orion Ltd leases a machine with a fair value of $69 594 to Triton Ltd for 5 years at an annual lease payment of $16 000. The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Triton Ltd does not intend to buy the machine at the end of the lease term. Orion Ltd incurred $2 000 to negotiate and execute the lease agreement. Orion Ltd purchased the machine for $69 594 just before the inception of the lease. The lease agreement details are as follows: Length

Length of lease	5 years
Commencement date	1-Jul-17
Annual lease payment, payable 30 June each year	$16 000
Fair value of the bulldozer at 1 July 2016	$69 594
Estimated economic life of the machine	8 years
Estimated residual value of the plant at the end of its economic life	$4 000
Residual value at the end of the lease term, of which 50% is guaranteed by Triton Ltd	$14 400
Interest rate implicit in the lease	9%

Requirement:

1- Does the Orion Ltd lease arrangement involve a finance lease or an operating lease? Justify your choice.

2- Critically evaluate the accounting treatment adopted by Orion Ltd with respect to the sale and leaseback agreement. Refer, where necessary, to relevant sections of AASB 117.

State how both companies should classify the lease. Provide reasons for your answer