On 1 April 20Y1 Smarty (see question 2) reassessed its future strategy and concluded that it would take up the option to lease the machine for a further two years from 1 October 20Y2. This was regarded as a modification to the original lease and Smarty re-computed the rate of interest implicit in the lease at 3% per half year.
Required:
(a) Show how the modification would be reflected in the financial statements of Smarty for the year ended 31 March 20Y2, providing relevant extracts as in Question 2.
(b) Hirer prepares financial statements to 30 September each year. Show how the lease would be accounted for by Hirer throughout its duration. You may assume that Hirer consistently retains the risks and rewards of ownership of the leased asset?