Question 2: Accounting for Leases [13 Marks] On 1 January 2008, Joyful Limited entered into an agreement to lease a machine for general use in the business. The agreement, which may not be terminated by either party to it, runs for seven years and provides for Joyful Limited to make an annual rental payment of $92,500 on 31 December each year. The cost of the machine to the lessor was $450,329 and has no residual value. There is no presumption that the lease will be extended. The machine has a useful economic life of eight years and Joyful Limited depreciates its property, plant and equipment using the straight-line method. Required: (a) Show how Joyful Limited will account for the above transaction in its statement of financial position at 31 December 2008, and in its statement of comprehensive income for the year ended under IFRS 16. The rate of interest implicit in the lease is 10% if there are payments for seven years. [8 Marks] (b) The lessor has suggested that the lease could be drawn up with a minimum payment period of one year and an option to renew or purchase. The lessor alleges that this would mean the lease could be kept "off balance sheet". Please discuss the rationale underlying this suggestion. [5 Marks]

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