QUESTION ONE – MAIN EXAM 2017 20 MARKS
Dashing Disco Ltd operates as a disco whose financial year ends on the 31 December. Dashing
Disco has leased a compact disc sound system from Ceedee Ltd. The sound system had a cost
and fair value of R19 880 000.
The term of the lease is 5 years with a R4 640 000 immediate payment on the 1 January 2015,
followed by similar prepaid annual instalments until the expiration of the lease term (or
payments are made in advance).
The guaranteed residual value at the end of the lease term is R2 000 000, and the estimated
economic life of the sound system is 8 years. At the end of the term Dashing Disco has an
option to purchase the sound system for the guaranteed residual value which is expected to be
materially less than the current value.
The implicit rate in the lease agreement is 12%. Dashing Disco's depreciation policy relating
to equipment is to apply a 20% per annum rate on the reducing balance, using the cost model.
Residual value is estimated to be nil.
Additional information:
The tax authorities grant the deduction of actual lease instalments when paid.
The normal income tax rate is 28%. All other taxes should be ignored.
Required:
Prepare the journal entries for the YEARS ending 31 December 2015 and 31 December 2016
as they will appear in the accounting records of Dashing Disco Ltd, assuming it uses the general
approach to account for the lease contract. (20 marks)
YOU MUST IGNORE JOURNAL NARRATIONS
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QUESTION TWO – SUPP EXAM 2017 20 MARKS
Mid Ltd leased out equipment to a local manufacturer on 1 January 2016. Mid Ltd acquired
equipment on the 1 January 2016 from an overseas supplier for R4 000 000.
The lease agreement stipulates amongst others the following:
Lease term of 3 years.
Three annual lease payments of R1 500 000 each payable on 1 January of every year.
A guaranteed residual amount of R200 000 to be paid by the lessee after which ownership
of the equipment will then transfer.
Additional information:
The effective interest rate is 17.082%.
The tax authorities tax lease instalments when received.
The normal tax rate is 28%.
You must ignore VAT.
The useful life of the equipment is estimated to be 3 years.
The wear and tear allowance, where applicable, should be assumed to be 33⅓ % per annum.
Profit before taxation correctly determined for 2016 is R3 978 000.
The financial period ends on 31 December.
Mid Ltd has correctly classified the lease agreement as a finance lease.
Required:
1. Provide the journal entries to account for the above lease in the accounting records of Mid
Ltd for the year ended 31 December 2016. (15 marks)
2. Prepare and disclose the statement of financial position of Mid Ltd as at 31 December 2016.
(5 marks)
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QUESTION THREE – TEST 2 - 2017 39 Marks
PART A: 22 Marks
Chick Ltd is one of the country’s leading suppliers of chicken and chicken by products. As
the company has grown substantially over the past few years, the CEO is constantly looking
for ways to speed up the production process. Chick Ltd has identified Pitch Ltd as a supplier
of machinery that could assist in speeding up the production process. The following items are
pertinent:
Chick Ltd will enter into a contract for the lease of a specialised machinery with Pitch Ltd
that will automate the entire packaging process. The terms of the lease agreement stipulate
the following:
The start date of the lease is 1 January 2017.
The lease is non-cancellable.
Chick Ltd will make all decisions on how to use the machine.
The lease term is 4 years, with arrear annual payments of R 369 800.
The machine is expected to have a useful life of four years, with no residual value.
The market value of the machine is R 1 055 771.
The implicit interest rate is 15%.
The following tax related information also applies:
Profit before tax, and before any adjustments relating to the above information is
R800 000.
There are no differences between accounting and taxable profit other than those evident
in the question;
The Tax Authority recognises this lease as a rental agreement, and thus allows the lease
instalment as a deduction when paid;
The tax rate is 30%;
Ignore VAT.
Required:
Prepare the journal entries for the year ended 31 December 2017 in relation to the above
lease, using the General Approach. (22 Marks)
Source: Nadia Latiff (Mrs)
PART B 12 Marks
In order to automate the point of sale process, Mickro Ltd entered into a contract with Blu
Ltd for the Lease of 12 Laptops. The commencement date of the lease is 1 May 2017, and the
duration of the lease is for a two year period. Each item is of low value and Mickro Ltd
applies the low value exemption of IFRS 16.
The lease agreement stipulates the following amounts to be paid over the lease term:
From 1 May 2017- 30 April 2018: R4 000 per month
From 1 May 2018- 30 April 2019: R6 000 per month.
In addition to the lease payments, the lessee is required to pay a monthly amount of R1 500
per month for servicing of the laptops as well as variable lease payment equal to 1% of sales
per annum. The annual sales as at 31 December 2017 is R4 825 000.
Required:
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Prepare the journal entries for the year ended 31 December 2017 in relation to the above.
Ensure all workings are included. 12 Marks
PART C 5 Marks
List the 5 criteria that, individually or in combination, could lead to a lease being classified as
a finance lease under Lessor accounting.
Source: Nadia Latiff (Mrs)
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QUESTION FOUR – TEST 2 2018 40 MARKS
This question consists of two independent parts all of which must be answered.
PART ONE 12 MARKS
Answer the following short questions:
1. Define what a lease is. 2
When is a supplier's right to substitute the asset substantive in the context of
2. 2
identifying a leased asset?
3. Define what a lease term is. 3
4. Define what a net investment in the lease is. 2
5. Define what the initial direct costs of a lease are. 3
(Source: Accounting@Francois, with unrelated date from Service)
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PART TWO 12 MARKS
On 1 January 2016, Yap Ltd leased, as lessee, a number of light fixed assets, all of which
were considered to be low-value assets.
The details of the lease agreements were as follows:
Instalments: to be made at the end of their respective periods:
Year 1: R 1 000 per month
Year 2: No payment is required
Year 3: R800 per month
Year 4: R18 000 per year
Year 5: R l 750 per month
Year 6: No payment is required.
The assets' useful lives are 7 years each.
The total market value of the leased assets was R42 000.
Where applicable, the company depreciates all its fixed assets on the straight-line basis
to zero residual values.
The tax authorities allow as deductions from taxable profits the actual lease payments
when made.
The normal taxation rate is 28%.
Yap Ltd satisfies the requirements to raise any deferred taxation assets in terms of IAS
12.
Ignore Value-Added- Taxation (V AT).
Required:
Using the simplified approach of IFRS 16, Show how the above information should be
disclosed in the statement of financial position of Yap Ltd as at 31 December 2016 and 31
December 2017. (12 marks)
(Source: Accounting@Francois)
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PART THREE 16 MARKS
The following lease details pertain to the activities of AKA (Pty) Ltd:
1. Commencement of lease: 1 January 2015;
2. Lease term: 6 years;
3. Lease installments: R287 091 payable at the end of each
financial period;
4. The implicit interest rate: 17%; and
5. Leased asset’s useful life: 5 years to a zero residual value.
Additional information:
6. As per IFRS 16, AKA (Pty) Ltd accounts for the lease using the general approach.
7. Initial costs incurred by the lessee of R124 675 were paid in cash on 1 January 2015.
8. The company has a December year-end.
9. Ignore all taxation.
10. Present value factors of R1 paid at 17% annually in arrears (end of the period):
Year 1 0.855
Year 2 0.731
Year 3 0.624
Year 4 0.534
Year 5 0.456
Year 6 0.390
Or annuity factor after 6 years 3.589
Required:
Process the relevant journal entries from the above information as they would have been
recorded in the books of AKA (Pty) Ltd for its financial years 2015 and 2016.
(17 marks)
(Source: Accounting@Francois)
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QUESTION FIVE – SPECIAL EXAM 2018 20 MARKS
On 1 January 2017 M & M Ltd entered, as lessee, into a lease agreement with N & N Ltd for
equipment that had a selling price of R3 150 000.
The lease agreement requires six annual payments of R618 000. The first payment is to be
made on 1 January 2017 and five subsequent payments are to be made on 31 December of each
year. The lessor and the lessee agreed on an estimated residual value of R335 350 at the end of
the 6-year period and M & M Ltd guarantees this residual value (M & M Ltd will pay this
residual amount at the end of the lease term).
The interest rate implicit in the agreement is 10%.
The economic life of the equipment is eight years. M & M Ltd uses the straight-line method to
depreciate equipment. The financial year-end is 31 December.
IGNORE ALL TAXATION.
Required
1. Discuss the list of all examples and other features that N & N Ltd, as lessor, should consider
in order to determine whether the lease agreement with M & M Ltd should be classified as
finance or as an operating lease, in according with IFRS 16. (9 marks)
2. Show all the relevant journal entries in the accounting records of M & M Ltd, as lessee, for
the year ended 31 December 2017. (11 marks)
(Source: Adapted by Accounting@Francois)
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QUESTION SIX –MAIN EXAM 2018 7 MARKS
Hospital Group Ltd, hereinafter referred to as “Hospital”, is listed on JSE under the Hospital
Management and Long Term Care sector. Hospital has traded profitably since its inception 15
years ago and is regarded as the market leader in terms of Hospital Management and Long
Term Care standards in the country. Hospital operates in all major cities within the country.
With the proposed introduction by government of the National Health Insurance Scheme,
hereinafter referred to as the “NHI”, the directors have become concerned as the current 6
month period ended 30 September 2018 has resulted in a loss for Hospital.
Dr Liga the CEO would like your assistance with the following matters that have come up:
1. Yotoya Transport Vehicles
Hospital entered into a three year contract with Yotoya Transport Division (Pty) Ltd,
hereinafter referred to as “Yotoya” a company that manufactures, leases and sells Yotoya
transport vehicles. Hospital wants to use 20 vehicles and offer a service of transporting
patients from their homes to hospital and from the hospital back to their homes.
The model and capacity of the vehicles are specified in the contract and the vehicles are
painted in the corporate colours of Hospital. Hospital provides its own drivers.
The vehicles are parked at Hospital’s premises when not in use and can be used for storage
or to transport passengers of other medical facilities. Yotoya cannot take back a vehicle
during the contract period. If a particular vehicle needs servicing or repairs, Yotoya is
required to substitute a vehicle of the same type.
Required:
Dr Liga would like you to discuss with reference to IFRS 16 Leases, whether the
arrangement contains a lease. (7 marks)
Source: Ranesha Narain CA (SA)
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QUESTION SEVEN – MAIN EXAM 2018 20 MARKS
Crown Gold Ltd (“Crown Gold”) is involved in the business of manufacturing specialised
mining machinery. The EMG1 (an earth moving machine) is one of the most popular machines
manufactured and sold by Crown Gold. Crown Gold has a 31 December 2017 financial year-
end and is a registered VAT vendor.
The costs to manufacture the EMG1 is R130 000. Crown Gold sells the EMG1 at a mark-up of
40% on cost.
Shining (Pty) Limited (“Shining”) is a company that owns a gold mine and their earth moving
machine broke. Due to the current economic conditions, Shining does not have excess funds to
outlay for the purchase of a new machine. Shining approached Crown Gold with a proposition
to lease an earth moving machine.
Crown Gold and Shining entered into a contract to effect the following terms:
Commencement date: 1 July 2017
Lease term: 5 years
Lease payments: R50 000 per an annum, payable in advance
Implicit interest rate is: 18,972089 %
The EMG1 has a useful life of 5 years, the residual value is zero.
Ignore taxation.
Required:
1. Taking the above information into account, calculate the following for Crown Gold:
a) Gross investment in the lease (1 Mark)
b) Selling price of the machine (2 Marks)
c) Gross profit of the machine based on the selling price calculated above. (1 Mark)
d) Finance income for the entire lease period (1 Mark)
2. Prepare the amortisation table for the entire lease period for Crown Gold. (6 Marks)
3. Prepare the journal entries for Crown Gold for the year-end 31 December 2017 and the
year-end 31 December 2018, using the gross method. (9 Marks)
Source: Ranesha Narain CA (SA)
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QUESTION EIGHT – SUPP EXAM 2018 20 MARKS
You are presented below with the financial information of Super Ltd.
Super Ltd entered into a lease agreement as a lessee over a plant.
The Details of the lease are as follows:
Commencement: 1 January 2017
Annual instalments paid on 31 December: R650 000
The implicit/Effective interest rate: 20%.
Bargain purchase option: R1.
Lease period: 6 years
Lessee’s initial costs R171 000
Lessor’ initial costs R194 000
Market price of the plant R2 161 582
Useful life of the plant 10 years
Depreciation method Straight-line method
Residual value R0
Additional information:
The tax authorities allow as deductions actual lease instalments when made and grant,
where applicable capital allowances on plant over three years as follows: 50%; 30% and
20%.
Assume that Vat is charged at 14% and all parties are Vat-Vendors.
Normal taxation rate is 28% and capital gains tax can be assumed to be at 80%.
The present value (PV) factors of R1 at 20% from year 1 to year 6 together with the PV
of annuity of R1 at 20% for 6 years follow: Y1: 0.833; Y2: 0.694; Y3: 0.579; Y4: 0.482;
Y5: 0.402; Y6: 0.335 or Y1 - 6: 3.3255.
Required:
1. Prepare, in accordance with the relevant IFRSs, the property, plant and equipment note to
the financial statements of Super Ltd for the year ended 31 December 2017. (10 marks)
2. Assuming that Super Ltd is a lessor (other lessor) and that interest rate implicit in the
lease is 16.63%, prepare the journal entries for the year ended 31 December 2017.
(10 marks)
YOU MUST IGNORE ANY COMPARATIVE FIGURES
(Source: Accounting@Francois)
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QUESTION NINE – SPECIAL EXAM 2019 6 MARKS
Adams Solutions Ltd entered into a non-cancellable lease contract with Juta Ltd. The contract
required Adams Solutions Ltd to lease certain equipment to Juta Ltd for a period of four (4)
years at an annual rental of R35 000 per annum payable in arrears. For the benefit of Adams
Solutions Ltd, you are asked to provide answers to the following questions:
1. State and briefly describe the two lease classification options available to Adams
Solutions Ltd. (2 marks)
2. Describe briefly what is meant by risks and rewards relating to the ownership of an
underlying asset. (1 mark)
3. What indicators of situations are provided in IFRS 16 Leases that could lead to a lease
being classified as a finance lease. (3 marks)
4. Define and explain the components of the lessor’s ‘net investment in the lease’.
(1 mark)
(Source: Accounting@Lungani2018)
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