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Question - Snape Limited enters into a non-cancellable lease on 1 July 2020 for the use of machinery by Hagrid Limited. The lease contract gives Hagrid the right to use the machinery for the period of the lease and is a lease for the purposes of IFRS 16 Leases.
Snape operates a finance business. It does not manufacture or trade in physical assets. Snape correctly classifies the lease as a finance lease.
The lease commenced on 1 July 2020. There are four annual payments of $85,000 with the first payment to be made on 30 June 2021.
Hagrid agreed to a residual value guarantee of $40,000 payable at the end of the lease on 30 June 2024 and expects it will pay this compensation based on how it has used similar assets in the past.
The interest rate implicit in the lease is 7%.
The fair value of the machine on 1 July 2020 was $316,428. Snape incurred $2,000 in legal costs in arranging the lease contract.
What is the value of the lease receivable on initial recognition under IFRS 16?
A. $356,428.
B. $318,428.
C. $320,428.
D. $316,428.
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