On 1 May 2017,Ellen Ltd entered into an agreement to acquire a distribution van. The terms of the agreement were that the vehicle would be leased for 5 years from the date of inception, subject to a deposit of 9,986 and 5 annual payments of 2,544 in arrears, commencing on 30th April 2018. The fair value of the vehicle and the present value of the lease payments were 24,000 at inception. The interest rate implicit in the lease is 8%. The key criterion of a finance lease is the transfer of substantially all the risks and rewards, making it almost equivalent to a sale, but without an immediate transfer of ownership.

Requirement:

In accordance with IFRS 16: Leases,

1. Briefly explain the three (3) steps of the lease classification process by the lessor.

3 marks

2. Show how the lease transaction will appear in the lessee's Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position as at 30 April 2019. 7 marks

(Total marks 10)