IFRS16 Suggested solutions to questions PDF

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FINANCIAL ACCOUNTING 300IFRS 16: LEASESSUGGESTED SOLUTIONS TO QUESTIONSL KotzeDEPARTMENTOFACCOUNTINGUPNB: The mark memoranda should not be taken as cast in stone for all questions of a similar nature. Marks allocated to a question depend on the difficulty of the question, the insight required in ord...

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FINANCIAL ACCOUNTING 300 IFRS 16: LEASES SUGGESTED SOLUTIONS TO QUESTIONS L Kotze

DEPARTMENT OF ACCOUNTING UP

NB: The mark memoranda should not be taken as cast in stone for all questions of a similar nature. Marks allocated to a question depend on the difficulty of the question, the insight required in order to answer the question and thus the time that is required to complete the question. The mark memoranda are provided to give you a guide as to the time that will be required to complete the question. QUESTION 1 SUGGESTED SOLUTION Part a – Carrying amounts of all assets on 30 September 20X9 Land (given) Factory building (calc 1) Investment property/Land and office building (given) Delivery vehicles (calc 2.2) Manufacturing plant (calc 3.2) Investments (given) Trade debtors (given) Inventories (calc 4)

(24 marks) (11½ marks) R ^ 1 500 000 (1½) 5 261 250  6 300 000 (4) 235 417 (2) 3 042 200 ^ 575 000 ^ 320 000 (1½) 2 670 000 19 903 867

Calculations: 1.

Factory building – carrying amount 30 September 20X9

Cost 1/4/20X7 (given) Depreciation to 30/9/20X9 ([R7 015 000 /10 yrs] ^ x 2½ years ^) Carrying amount 30/9/20X9 (or: ([R7 015 000 /10 yrs]  x 7½ years ^)

R ^7 015 000 (1 753 750) 5 261 250 (1½  above)

2 2. Delivery vehicles (purchased in terms of a lease contract) 2.1 Calculation of amount at which the right-of-use asset for vehicles is initially recognised Present value lease payments discounted at lessee’s incremental borrowing rate, which is R1 680 000 PMT = 675 990 (given) ^ N = 3 (1/3/X7 – 28/2/X10) ^ FV = 100 000 (25 000 additional payment with last payment x 4) ^ I/YR = 12,50 (given) ^ Thus PV = R1 679 998 R 1 679 998 15 000 1 694 998

Present value (above) Initial direct costs incurred (given) Thus cost of right-of-use asset on 1/3/20X7

(3  calc 2.2)

2.2

Carrying amount on 30 September 20X9

Cost 1/3/20X7 (calc 2.1) Accumulated depreciation to 30/9/20X9 (R1 694 998/3 yrs ^ x 2 yrs 7 months ^) (1/3/X7 – 30/9/X9) Or: (R1 694 998/36 months ^ x 31 months ^) Or: (R1 694 998 (3) /36 months ^ x 5 months ^)

R 1 694 998 (1 459 581)

(3)

235 417 (4  above)

3.

Manufacturing plant – carrying amount 30 September 20X9

Costs incurred (given) Depreciation 1/10/20X7 – 30/9/20X9 ({R3 502 600 – R49 600 ^}/15 yrs ^ x 2 yrs ^)

R ^ 3 502 600 (460 400) 3 042 200 (2  above)

4.

Inventories on 30 June 20X9

Amount given Write down to net realisable value (R920 000 ^ – R890 000 ^) given

R ^ 2 700 000 (30 000) 2 670 000 (1½  above)

3 Part b – General journal entries year ended 30 September 20X9 for lease (12½ marks) Dr R

Cr R

28 February 20X9 ^ ^

^ ^

^ ^ ^

Finance costs / Interest expense (P/L) Lease liability (SFP) Finance cost for period 1/10/20X8 – 28/2/20X9  (Using info in calc 2.1 of part a, AMORT 2 INT = R151 751 x 5/12 ^ = R63 230) Lease liability (SFP) Bank (SFP) Lease payment paid on 28/2/20X9  Alternative journal for lease payments: Finance costs / Interest expense (P/L) Lease liability (SFP) (bal) Bank (SFP) Finance cost for period 1/10/20X8 – 28/2/20X9  and Lease payment paid on 28/2/20X9 

63 230 63 230 3½

^ 675 990 675 990 2½ (1½)

63 230

 612 760 675 990

30 September 20X9 ^ ^

^ ^

Finance costs / Interest expense (P/L) Lease liability (SFP) Finance cost for period 1/3/20X9 – 30/9/20X9  (Using info in calc 2.1 of part a, AMORT 3 INT = R86 221 x 7/12 ^ = R50 296) Depreciation (P/L) Right-of-use asset – delivery vehicles (SFP) Depreciation for year ended 30/9/20X9  (R1 694 998 part a / 3 years) m/t

NB: -1 mark if journals are not dated.

50 296 50 296 3½ 564 999 564 999 3

4 QUESTION 2

(19½ marks; 30 minutes)

SUGGESTED SOLUTION Part a - notes Confused Limited Notes for the year ended 30 June 20X8

(16½ marks) -½ mark if heading incomplete

22.

Lease agreements in which the company is the lessee

22.1

Right-of-use assets (8 marks)

Carrying amount beginning of year (calc) Depreciation Carrying amount end of year 22.2



Plant ^ R (6) 33 966 ^m/t (13 587) 20 379

Income and expenses related to leases (3½ marks) R

Expenses Depreciation ^ Finance cost related to lease liabilities ^ [(3^ AMRT INT = R4 707 / 2 ^) + (4 ^ AMRT INT = R3 678 / 2 ^)] 22.3

^m/t 13 587 (2)

4 193

Lease liabilities (2 marks)

Lease liabilities outstanding using undiscounted cash flows ^ are payable as follows: In 20X9 In 20X10 (15 000 + 13 000) 22.4

R ^ 15 000  28 000 43 000

Additional information (2 marks)

 There is a lease agreement for plant for which a right-of-use asset and lease liability have been recognised.   The lease agreement prohibits the company from the declaration and payment of ordinary dividends throughout the lease term.  22.5

Total cash outflow for leases for reporting period (1 mark) R

Total cash outflows during reporting period

15 000

5 Part 2 – deferred tax calculation

(3 marks) CA R

30/6/20X8 Lease liability (36 777 ^m/t + [3 678 x 6/12] ^m/t) Right-of-use asset

TB R

TD R

38 616

^-

(38 616)

^m/t 20 379

^-

20 379

DT (28%)^ R (dr)/cr (10 811) 5 706 (5 105)

Calculations Plant JT200 PMT = 15 000 ^ PV = 71 143 ^ N=5^ FV ={7 000 (RVG) + [10 000 – 7 000] (UGRV)} ^ + 13 000 extra final payment ^ = 23 000 Comp I/YR = ? = 10 (2½  below) Thus, the interest rate implicit in the lease, 10%. The lessee will now calculate its present value by using the 10% interest rate, but will not take into account the unguaranteed residual value. PMT = 15 000 ^ I/YR = 10 (2½) above N=5^ FV = 13 000  {0 (RVG) as lessee estimates fair value of asset at end of lease term to be R7 000, therefore does NOT expect to pay any amount to lessor at end of lease term) + 13 000 extra final payment} Comp PV = ? = 64 934 (4½  below) Date

31/12/20X5 31/12/20X6 31/12/20X7 31/12/20X8 31/12/20X9

Payment

Capital

Interest

R

R

R

15 000 15 000 15 000 15 000 15 000

8 507 9 357 10 293 11 322 12 455

6 493 5 643 4 707 3 678 2 545

Capital balance O/S R 64 934 56 427 47 070 36 777 25 455 13 000

6 Depreciation and carrying amount of right-of-use asset R Cost of right-of-use asset (calc above) [R64 934 (4½) (PV of lease payments) + R3 000^ (initial direct costs Cumulative depreciation to 30/07/20X7 R67 934 / 5 years^ (shortest of useful life of 8 years and lease term of 5 years) = R13 587 per year R13 587 x 2,5 years ^ = R33 968 Carrying amount on 30/07/20X7 Depreciation current year (above) Carrying amount on 30/07/20X8

(5)

(1)

67 934

(33 968)

33 966 (6  note 22.1) (13 587) 20 379

7 QUESTION 3

(14 marks: 21 minutes)

SUGGESTED SOLUTION

(14 marks)

Journal entries for the year ended 30 April 20X10 Dr R J1

J2

J3

J4

J5

Right of use asset - plant (SFP) ^ (R661 200/114% x 100%) ^ Finance lease liability (SFP)

Cr R

661 200 ^661 200

Finance cost/Interest expense (P/L) ^ Lease liability (SFP) ^ (R82 650 ^ x 9/12 ^)

61 988

Depreciation (P/L) ^ Right of use asset - plant (SFP) ^ (R661 200 ^ m/t Jnl 1/ 5 yrs ^ x 9/12 ^)

99 180

1

61 988 2 99 180 2½

Income tax expense (P/L) ^ Current tax owing/SARS (SFP) ^ (refer calc 1)

(2)

Deferred tax liability (SFP) ^ Income tax expense (P/L) ^ (refer calc 2)

(4½)

305 064 305 064 3 45 127 45 127 5½

Calculations: 1.

Current tax R

Accounting profit after finance lease taken into account (given) Add: Depreciation (Jnl 3) Finance cost (Jnl 2) Taxable profit Current tax (R1 089 513 x 28% ^)

^928 345 ^ m/t 99 180 ^ m/t 61 988 1 089 513 305 064 (2  Jnl 4)

8 2.

Deferred tax

Bal 30/4/X10 (given) Finance lease asset Finance lease liability

(1) (1)

CA

TB

TD

R

R

R

562 020 (a) 723 188 (b)

^^-

(c)

562 020 (723 188)

DT (28%)  (dr)/cr R 675 235 157 366 (202 493)

630 108 (4  below) Thus movement to P/L (R675 235 ^ – R630 108 (4)) = R45 127 (credit) (4½  Jnl 5) (a) R661 200 Journal 1 ^ – R99 180 Journal 3 ^ = R562 020 (1  DT calc) (b) R661 200 ^m/t + R61 988 ^m/t = R723 188 (1  DT calc) (c) R723 188 – R723 188 = Rnil

9 QUESTION 4

(13½ marks: 20 minutes)

SUGGESTED SOLUTION

(13½ marks)

Part a – calculation of income tax expense

(6½ marks) R 191 362 (3) (3 482) 187 880

(3½)

Current tax (calc 2) Deferred tax (calc 3)

Calculations: 1. Calculation of lease payment I/YR = 10,5 ^ N=5^ PV = 200 000 ^ Thus PMT = R53 435 (1½  calc 2) Amortisation table (for completeness only)

31/12/20X3 31/12/20X4 31/12/20X5 31/12/20X6 31/12/20X7

Payment

Interest

Capital

R

R

R

53 435 53 435 53 435 53 435 53 435 267 175

21 000 17 594 13 831 9 673 5 077 67 175

32 435 35 841 39 604 43 762 48 358 200 000

Capital outstanding R 200 000 167 565 131 724 92 120 48 358 -

2. Current tax calculation Profit for the year before lease agreement accounted for (given) Lease payment (calc 1) Tax allowance on machine “rented” by lessor (10% x R200 000)  Taxable profit Income tax expense (28%^ x R683 435)

R ^ 650 000 (1½) 53 435 (20 000) 683 435 191 362 (3½  above)

Note: Interest income (AMORT 1 INT = R21 000 do not have to be subtracted as the starting point of this calculation was the accounting profit BEFORE the lease agreement was accounted for. The amount of R650 000 would therefore not include the R21 000 yet.

10 1. Deferred tax calculation CA R Bal begin year 31/12/20X3 Finance lease debtor

(1)(a)

167 565

TB R

(1)(b)

180 000

(a)

AMORT 1 BAL  = R167 565 (1  above)

(b)

R200 000^ x 9/10 years^ = R180 000 or R200 000 ^– (R200 000/10 years) ^ = R180 000

TD R

2. ^ 3. ^ 4. ^ 5. ^

^ Gross investment in finance lease/Finance lease debtor (SFP) (R53 435 ^m/t x 5 payments ^) ^ Machinery (SFP) ^ Unearned finance income (SFP) Bank (SFP) Gross investment in finance lease/Finance lease debtor (SFP) Unearned finance income (SFP) Finance/Interest income (P/L) Income tax expense (P/L) Current tax owing (SFP) Deferred tax (SFP) Income tax expense (P/L)

^ movement (3 482) (3  above)

(12 435)

(1  above)

Part b – journal entries

1.

DT (28%)^ R (dr)/cr

(7 marks) Dr R 267 175

Cr R

^200 000 67 175

3

53 435

1

21 000

1

191 362

1

3 482

1

^m/t 53 435 ^m/t 21 000 ^m/t 191 362 ^m/t 3 482

11 QUESTION 5 AGREEMENT 1

(49½ marks: 74 minutes) (12 marks: 18 minutes)

SUGGESTED SOLUTION Scrat Limited Notes for the year ended 30 September 20X9

(12 marks)

-½ mark if heading incomplete

PART A 22.

Lease agreements in which the company is the lessee (4½ marks)

22.1

Income and expenses related to leases

(7½ marks)

R Expenses  145

Variable lease payments expense ^ (R14 500 x 1%) Low-value asset lease expense (calc 1)

(2)

37 500

 The company has elected to apply the simplified accounting method for its low-value asset lease of equipment.  22.2

Additional information (2 marks)

 There are future cash flows to which the company is potentially exposed that are not reflected in the measurement of the lease expense for low value assets, which include: - Variable lease payments calculated at 1% of the cost of electricity used by the equipment to protect the lessor against overuse of the lease asset.  - The company may not pay or declare any dividends during the lease term.  22.3

Total cash outflow for leases for reporting period (1 mark) R

Total cash outflows during reporting period

0

12 Calculations 1.

Calculation of lease expense

Years 1 – 3 (R51 000 x 3) ^ Less: maintenance costs not to be included (R1 000 x 3) ^

R 153 000 (3 000) 150 000

Thus lease expense on 30/9/20X9 (R150 000 / 36 months ^ x 9 months^)

37 500 (2  note 1)

OR: [(R51 000 ^ – 1 000 ^) x 9/12 ]

37 500 (2  note 1)

OR: Years 1 – 3 (R51 000 x 3) ^ Less: maintenance costs not to be included (R1 000 x 3) ^ 30/9/20X9 Lease expense (R150 000 / 3 x 9/12)  PART B

153 000 (3 000) 150 000 37 500 (2  note 1) (4½ marks R

Accounting profit before tax (given) Operating lease: - Initial direct costs - Lease expense (calc 1; part A) - Variable lease (note; part A) Repairs and maintenance (R10 000 x 9 / 12) Accounting profit before tax (calculated) Temporary differences: - Lease expense - Variable lease expense - Repairs and maintenance Taxable profit Current tax at 28% (R1 199 000 x 28%)

^1 200 000 ^ (1 000) ^m/t (37 500) ^m/t (145) ^ (750) 1 160 605 ^m/t 37 500 ^m/ t 145 ^mt 750 1 199 000 ^m/t 335 720

13 QUESTION 5

(49½ marks: 74 minutes)

AGREEMENT 2

(11½ marks: 17 minutes)

SUGGESTED SOLUTION

(11½ marks)

Journal entries for year ended 30/09/20X9 Dr R

Cr R

1 April 20X9 1. ^Gross investment in finance lease (SFP) (R1 604 860 (1½) calc 1 – R920 381 ^ (given) ^Unearned finance income (SFP)

684 479

2. ^Cost of sales (P/L) ^Gross investment in finance lease (SFP)

^16 000

684 479

16 000

3

1½

Alternative to Jnl 2 above Bank (SFP) Gross investment in finance lease (SFP) Cost of sales (P/L) Bank (SFP) 3. ^Cost of sales (P/L) ^Inventories (SFP)

16 000 16 000 16 000 16 000 ^685 000 685 000

1½

80 243

1½

30 September 20X9 4. ^Lease income (P/L) ^Gross investment in finance lease (SFP)

^80 243

Alternative to Jnl 4 above Lease income (P/L) Bank (SFP )

80 243

Bank (SFP) Gross investment in finance lease (SFP)

80 243

5. ^Unearned finance income (SFP ) ^Finance income (P/L) (Amortisation schedule (2) AMORT 1 INT  = R55 223)

80 243

80 243 55 223 55 223

4

14 Calculations: 1. Calculation of unearned finance income Gross investment (R80 243 ^ x 2 payments per year ^ x 10 years ^) Unearned finance income (balancing or see below) Net investment (calc 1)

R 1 604 860 (1½  Jnl 1 part a) (684 479) 920 381

To calculate the total unearned finance income: 1 INPUT 2nd F 20 AMORT INT = R684 479 3. Amortisation schedule for lease contract PMT = 80 243 N = 20 [10 years x 2 payments per Year] PV = 920 381 Thus I/YR = 6% half-yearly, thus 12% per year (6% x 2) (2  Jnl 1 part a) Up to and including 30/09/20X9 30/09/20X10 30/09/20X14 30/09/20X18

Instal

1 2–3 4 – 11 12 – 20

Payment R 80 243 160 486 641 944 722 187 1 604 860

Capital R 25 020 54 634 294 939 545 788 920 381

Interest R 55 223 105 852 347 005 176 399 684 479

Capital outstanding R 895 361 840 727 545 788 0

15 QUESTION 5

(49½marks: 74 minutes)

AGREEMENT 3

(26 marks: 39 minutes)

SUGGESTED SOLUTION

(26 marks)

a) Journal entries

(8 marks) Dr R

Cr R

1 October 20X8  

Right-of-use asset – delivery vehicle (SFP) Lease liability (SFP)

^ 303 714

Right-of-use asset – delivery vehicle (SFP) Bank (SFP)

^ 20 000

303 714 20 000

30 September 20X9   

Finance cost (P/L) Lease liability (SFP)

^ 37 964

Lease liability (SFP) Bank (SFP)

^ 85 299

37 964 85 299

Depreciation (P/L) Right-of-use asset – delivery vehicle [(R303 714 + R20 000) / 5 years] 

64 743 64 743

Marking comments:  -1 mark if journals are not dated.  Journal must be 100% complete and correct to get the 1 mark for the general ledger accounts used.

b) Calculation of deferred tax CA R Right-of-use asset (calc 1) Cost excl deposit Deposit Lease liability (R303 714 + R37 964 – R85 299) 

^m/t 258 971

TB R

TD R

^- (a)

* 242 971 * 16 000

-

256 379

^- (b)

258 971

(3 marks) DT (28%)^ R (dr)/cr 72 512

242 971 16 000 (256 379)

(71 786)

726 * If the discussion of the deferred tax amounts is not required, it is not necessary to allocate the carrying amount of the right-of-use asset into its component parts as has been done here.

16 Explanation of amounts used in deferred tax calculation

(15 marks)

 The lease contract is classified as a lease agreement in terms of the Income Tax Act, so the lease payments paid in cash in any year will be allowed as a deduction for tax purposes.   The carrying amount of the right-of-use asset represents the cost reduced by the depreciation for the year.  The carrying amount has been split in the deferred tax calculation as the tax base must be considered for each of the components.   Tax base of the right-of-use asset is Rnil  for the following reasons: - The delivery vehicle will be used by the lessee to produce taxable benefits in the future, thus the tax base is the amount of this asset that will be allowed as a deduction in the future for tax.  - Since the lessee is not the legal owner of the asset, SARS does not grant any capital allowances to the lessee. Thus, the TB for R242 971 will be Rnil.  - The deposit amount was allowed as a tax deduction in the current tax calculation for the current year, thus there can be no further tax deductions in the future. Thus the tax base is Rnil.  - Since the carrying amount exceeds the tax base, this will result in taxable temporary differences for which a deferred tax liability will be recognised at 28%, namely R72 512.   The carrying amount of the lease liability represents the capital portions (PV amounts) of the future lease payments that the lessee will be paying to the lessor.   Tax base of this liability is calculated as Rnil  for the following reasons: - TB = CA – amount of this CA that is deductible for tax in the future.  - Since the lease is a lease agreement for income tax purposes, the amount that ...