Heavy Metal Ltd has requested your help in preparing their financial statements as they are unsure of the new requirements of NZ IFRS 16 Leases for lessees.

You are provided with the following lease details:

Heavy Metal Ltd is the:	Lessee
Commencement date	1 April 2019
Lease term	7 years
Economic life of asset	8 years
Interest expense SCF classification	CFOA
IDC incurred by the lessee	$4 200
Upfront payment due on the commencement date	$40 000
Fixed payments per annum payable at year end	$120 000
Extra final payment at end of the lease	$40 000
Ownership transfers to the lessee at end of lease	Yes
Lessees incremental borrowing rate	8%
The depreciation method used by the lessee	Straight line
The relevant present value discount factors are:
Present value of $1 in n periods n = 7	0.5835
Present value of an annuity i = 8%	5.2064

The accountant of Heavy Metal Ltd has provided you with the following lease payment schedule before going on leave.

Table for the Lessee	Lease Payments	Interest Expense 8%	Lease Liability Reduction	Lease Liability Balance
Commencement of lease on 1 April 2019				648 108
31/3/2020	120 000	51 849	68 151	579 957
31/3/2021	120 000	46 397	73 603	506 354
31/3/2022	120 000	40 508	79 492	426 862
31/3/2023	120 000	34 149	85 851	341 011
31/3/2024	120 000	27 281	92 719	248 292
31/3/2025	120 000	19 863	100 137	148 155
31/3/2026	120 000	11 845	108 155	40 000
31/3/2026	40 000	-	40 000	-
	$880 000	231 892	$648 108

Required:

(i) Prepare the journal entry to initially recognise the ROU asset and lease liability, at the commencement date.

Question 1 Part A continued:

(ii) Prepare financial statements for Heavy Metal Ltd to reflect the effects of the lease for the financial periods ending 31 March 2020, 2025, and 2026.

(iii) Prepare the final journal entry to derecognise the ROU asset and to recognise the transfer of ownership to the lessee.

(iv) Based on the lease details provided for the lessee, how would the lessor have classified the lease based on the guidance in NZ IFRS 16 Leases? Explain your answer.