[PROFKOD]

A lessee, Jack Ltd enters into a five-year lease of a building which has a remaining useful life of ten years. Lease payments are GH¢5,000,000 per annum, payable at the beginning of each year. The lessee incurs initial direct costs of GH¢2,000,000 and receives lease incentives of GH¢500,000. There is no transfer of the asset at the end of the lease and no purchase option. The interest rate implicit in the lease is not immediately determinable but the lessee’s incremental borrowing rate is 5%.Required: Explain and illustrate how the above transaction should be accounted for by the Jack Ltd for the five years.

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