Question 3b

Kappa prepares financial statements to 30 September each year. On 1 October 2016, Kappa began to lease a property on a 10-year lease. The annual lease payments were $500,000, payable in arrears – the first payment being made on 30 September 2017. Kappa incurred initial direct costs of $60,000 in arranging this lease. The annual rate of interest implicit in the lease is 10%. When the annual discount rate is 10%, the present value of $1 payable at the end of years 1–10 is 6·145 dollars.

Required: 
(b) Explain and show how these transactions would be reported in the financial statements of Kappa for the year ended 30 September 2017 under IFRS 16 – Leases. (8 marks)