Question 2a

Delta is an entity which prepares financial statements to 31 March each year. Each year, the financial statements are authorised for issue on 25 May. The following events have occurred which are relevant to the year ended 31 March 2017:

Event (a)
On 1 April 2016, Delta purchased an asset for $771,000 and immediately leased this asset to entity X. The lease term was for five years and the lease rental, receivable annually in arrears on 31 March, was $200,000. Delta incurred direct costs of $20,000 in arranging this lease. The annual rate of interest implicit in this lease was 10%. Under the terms of the lease, entity X is responsible for insuring the asset and for carrying out any necessary repairs and maintenance of the asset. At a discount rate of 10% per annum the present value of $1 receivable annually in arrears for five years is $3·80. (8 marks)

Required:
Explain and state (where possible by quantifying amounts) how the three events would be reported in the financial statements of Delta for the year ended 31 March 2017.

Note: The mark allocation is shown against each of the three events above. You should assume that all amounts described here are material.