Question 3 You are a Financial Consultant for a large consultancy firm. Muuka Plc is an entity specialized in leasing out various non-current assets to wide ranging clients. The company engaged in the following leasing arrangements in the year to 31 March 2021 for which you have been contacted to advice on the required accounting treatment in Muuka Ple's financial statements. Transaction one Muuka Plc leased out a machine that is used in the manufacture of soft drinks to Kuma Limited. The machine has an economic useful life of four (4) years. The terms of the lease agreement include the following: The lease will be for a period of three (3) years. Kuma Limited will be required to pay annual rentals of K950,000 per annum commencing 31 March 2021. Lease rentals will be paid in arrears on 31 March of each year. The lease contract provides for transfer of ownership of machine and option to buy the machine at lower than fair value, to Kuma Limited at the end of the lease term. Contract also states that any losses that may arise from machine idle time will be borne by Kuma Limited as the nature of the machine is in such a way that no any other client would be able to use it except Kuma Limited. Furthermore, the contract provides for Kuma Limited to continue to lease the asset for a secondary period at a rent that is substantially lower than market rent. It is Muuka Plc policy to depreciate machinery on straight line basis. The implicit interest rate is 8%. Transaction two On 1 April 2020, Boobo entered into a lease agreement to rent an item of plant from Muuka Ltd, a company specialized in leasing non-current assets to business houses in Kitwe. The terms of the agreement were that Boobo would pay 3 rentals of K38,000 per annum in advance commencing on 1 April 2020 with an option to extend the lease term for a further 2 years for rentals of K45,000 per annum in advance in the optional period. Boobo is certain it would continue to use the plant in the optional period. The plant has a useful economic life of 6 years. To obtain the lease, Boobo incurs initial direct costs of K20,000 arising from legal fees related to the transaction. The lessee received lease incentives amounting to K5,000 from the lessor. The lease provides for the transfer of title of leased asset to the lessee at the end of the lease term. Boobo's cost of borrowing is 8%. Required: (i) Discuss, giving reasons, the required accounting treatment for transaction ONE above in Muuka Plc's financial statements for the year ended 31 March 2021. (15 marks) Explain the required accounting treatment of transaction TWO above in the books of (ii) Boobo for the year ended 31 March 2021. (10 marks)