IFRS 16, IAS 36 & IFRS 5

The Following Information pertains to question 1 – 3:

On 1 January 2023, Hunter Ltd entered into a 10−year lease of a floor of a building, with an option to extend the lease for five years. The lease payments are R50,000 per year during the initial term and R55,000 per year during the optional period.  Lease payments are due at the end of each year. The first lease payment was made on the 31 December 2023. Hunter Ltd incurred initial direct costs of R20,000 on the lease. R15,000 of the initial direct costs was payment to a former tenant occupying that floor of the building and R5,000 was commission paid to the real estate agent who arranged the lease. As an incentive to Hunter Ltd for entering into the lease, the lessor agreed to reimburse the real estate agent's commission of R5,000 and the cost of leasehold improvements incurred by Hunter Ltd of R7,000.

 

At the commencement date, Hunter Ltd was not reasonably certain that they would exercise the option to extend the lease.

 

The interest rate implicit in the lease is not readily determinable and Hunter Ltd’s incremental borrowing rate is 5% p.a. which reflects the fixed interest rate at which Hunter Ltd could borrow the funds to obtain the right of use asset in the same currency for a 10−year term with similar collateral.

Question 1:

 Prepare the journal entries required in Hunter Ltd to initially recognise the lease on 1 January 2023. Ignore tax. Round off to the nearest rand.

• Option A

• Option B

• Option C

• Option D

• Option E

The Following Information pertains to question 1 – 3:

On 1 January 2023, Hunter Ltd entered into a 10−year lease of a floor of a building, with an option to extend the lease for five years. The lease payments are R50,000 per year during the initial term and R55,000 per year during the optional period.  Lease payments are due at the end of each year. The first lease payment was made on the 31 December 2023. Hunter Ltd incurred initial direct costs of R20,000 on the lease. R15,000 of the initial direct costs was payment to a former tenant occupying that floor of the building and R5,000 was commission paid to the real estate agent who arranged the lease. As an incentive to Hunter Ltd for entering into the lease, the lessor agreed to reimburse the real estate agent's commission of R5,000 and the cost of leasehold improvements incurred by Hunter Ltd of R7,000.

At the commencement date, Hunter Ltd was not reasonably certain that they would exercise the option to extend the lease.

The interest rate implicit in the lease is not readily determinable and Hunter Ltd’s incremental borrowing rate is 5% p.a. which reflects the fixed interest rate at which Hunter Ltd could borrow the funds to obtain the right of use asset in the same currency for a 10−year term with similar collateral.

Question 2:

Assuming the correct balance on commencement of the lease was R386 087. The balance on the lease liability at 31 December 2023 was: Round your answers to the nearest rand.

• R416 782

• R455 391

• R386 087

• R355 391

• Some other amount.

The Following Information pertains to question 1 – 3:

On 1 January 2023, Hunter Ltd entered into a 10−year lease of a floor of a building, with an option to extend the lease for five years. The lease payments are R50,000 per year during the initial term and R55,000 per year during the optional period.  Lease payments are due at the end of each year. The first lease payment was made on the 31 December 2023. Hunter Ltd incurred initial direct costs of R20,000 on the lease. R15,000 of the initial direct costs was payment to a former tenant occupying that floor of the building and R5,000 was commission paid to the real estate agent who arranged the lease. As an incentive to Hunter Ltd for entering into the lease, the lessor agreed to reimburse the real estate agent's commission of R5,000 and the cost of leasehold improvements incurred by Hunter Ltd of R7,000.

At the commencement date, Hunter Ltd was not reasonably certain that they would exercise the option to extend the lease.

The interest rate implicit in the lease is not readily determinable and Hunter Ltd’s incremental borrowing rate is 5% p.a. which reflects the fixed interest rate at which Hunter Ltd could borrow the funds to obtain the right of use asset in the same currency for a 10−year term with similar collateral.

Question 3:

Assuming the correct balance on the right of use asset on commencement of the lease was R394 087. The right of use asset at 31 December 2023 was: Round your answers to the nearest rand.

• R354 678

• R433 495

• RNil

• R394 087

• Some other amount.

Question 4:

Entity X entered into a 15-year contract with a supplier for the right to use a specific amount of capacity within a cable connecting Johannesburg to Capetown. The contracted capacity is equivalent to the use of 3 fibre strands within the cable.

The cable contains 15 fibres with similar capacities. The supplier oversees the cable usage, they determine which fibres are used to transmit the data and which equipment will be used to connect to the fibres.

Is there an identified asset in the above contract?

A. Yes. There is an identified asset

B. No. There is no identified asset

• Option A

• Option B

 

The Following Information pertains to question 5 – 6:

A lessor entered into a finance lease agreement for equipment on the following terms:

The lease term is 5 years from 1 January 2023, with equal fixed annual instalments of R23 982 payable at the beginning of each year. The guaranteed residual value agreed by both parties is R10 000. There is an unguaranteed residual value implicit in the contract of R2 000.

The fair value of the equipment is R100 000, which is also equal to is carrying value in the lessors books (Original cost R180 000). The estimated useful life of the equipment is 5 years. The lessor incurred legal fees of R5 000 when entering the into the lease.

Question 5:

Calculate the interest rate implicit in the lease. Round your answer off to the nearest 3 decimal places.

• 11.267%

• 10.740%

• 10.636%

• 14.053%

• 7.631%

The Following Information pertains to question 5 – 6:

A lessor entered into a finance lease agreement for equipment on the following terms:

The lease term is 5 years from 1 January 2023, with equal fixed annual instalments of R23 982 payable at the beginning of each year. The guaranteed residual value agreed by both parties is R10 000. There is an unguaranteed residual value implicit in the contract of R2 000.

The fair value of the equipment is R100 000, which is also equal to is carrying value in the lessors books (Original cost R180 000). The estimated useful life of the equipment is 5 years. The lessor incurred legal fees of R5 000 when entering the into the lease.

Question 6:

Prepare the journal entries required for the lessor to initially recognise the lease on 1 January 2023. Ignore tax. Round all amounts to the nearest Rand.

• Option A

• Option B

• Option C

• Option D

• Option E

Question 7:

HHP Limited owns a machine. The machine was partly damaged due to a fire that broke out in the factory in which it is situated. The management of HHP Limited need your assistance in determining the recoverable amount of the machine at year end.

The following information is relevant in this regard: The machine can be disposed of for R500 000, in an orderly transaction between market participants. In order to sell the machine, it has to be serviced and tuned at a cost of R10 000. Direct selling expenses of R5 000 would also have to be incurred.

Management determined the value in use to be R475 000 at year end. The machine had a carrying amount of R650 000 at year end.

The recoverable amount of the machine at year end amounts to?

• R475 000

• R485 000

• R495 000

• R490 000

• None of the above.

Question 8:

ABC Limited owns a machine. The machine was partly damaged due to a fire that broke out in the factory in which it is situated. The fair value less costs to sell of the machine was determined by management to be R380 000 and that they determined that the machine will generate net cash flows of R150 000 for the rest of its useful life of 3 years.

An appropriate pre -tax discount rate is 10%. Assume that cash flows occur at the end of the period and that the machine had a carrying amount of R650 000 at year end.

Calculate the machines value in use.

• R380 000

• R450 000

• R650 000

• R410 330

• None of the above.

Question 9 and 10 is based on the below scenario:

Proquip is a leading supplier of machinery used in the mining industry. The company has a 30 June year end. On 1 July 2020 the company purchased Machine A which cost R5 000 000. The machine is depreciated at a rate of 20% p.a on the diminishing balance method.

Due to the latest advances in technology, management decided to sell the machine on 30 May 2022 and to buy a new one. All the requirements of IFRS 5 Non-current Assets Classified as Held for Sale and Discontinued Operations, to classify the machine as held for sale, were met on 30 May 2022. The fair value of the machine at that date was R2 500 000. The machine had not yet been sold on 30 June 2022. The fair value less costs to sell was still R2 500 000 at year end.

Question 9:

Assuming that the carrying amount of machine A was R3 266 667 on 30 May 2022, calculate the amount that will be recognized in Proquip's statement of profit and loss and other comprehensive income in respect of the impairment of Machine A on 30 June 2022 is?

• R766 667

• R733 333

• R1 500 000

• R1 733 333

Question 9 and 10 is based on the below scenario:

Proquip is a leading supplier of machinery used in the mining industry. The company has a 30 June year end. On 1 July 2020 the company purchased Machine A which cost R5 000 000. The machine is depreciated at a rate of 20% p.a on the diminishing balance method.

Due to the latest advances in technology, management decided to sell the machine on 30 May 2022 and to buy a new one. All the requirements of IFRS 5 Non-current Assets Classified as Held for Sale and Discontinued Operations, to classify the machine as held for sale, were met on 30 May 2022. The fair value of the machine at that date was R2 500 000. The machine had not yet been sold on 30 June 2022. The fair value less costs to sell was still R2 500 000 at year end.

Question 10:

Assume the same information as question 3 above but the company found a potential buyer (Kupta Ltd) at the beginning of May 2023. Negotiations regarding the sale of the machine commenced immediately, however while negotiations were underway media outlets all over the country published a story about Kupta's management's corrupt activities. Proquip decided not to go ahead with the sale as they have a no tolerance policy for unethical behavior. The machine was therefore sill not sold at the end of June 2023. The fair value less costs to sell was R2200 000 at that date.

The directors are of the opinion that the machine should no longer be classified as held for sale at year end as it was not sold within 12 months as per the requirements of IFRS5. They still intend on selling the machine and are committed to a plan to sell it. A small mining company expressed keen interest in purchasing the machine at the end of July 2023.

Is the following statement true or false?

 

The directors are correct in stating that the machine no longer meets the definition of a non-current asset held for sale at 30 June 2023 and the requirements of IFRS 5 no longer apply as at 30 June 2023.

• True

• False