Professional Documents
Culture Documents
(Pty) Ltd
(20 marks; 6 minutes reading time; 30 minutes writing time)
IGNORE VAT
Lessee (Pty) Ltd (“Lessee”) is a manufacturing business in Durban. The reporting date of Lessee is
31 December. The following transactions occurred during 2009:
1. On 1 January 2009, Lessee entered into a lease agreement for machinery with a local supplier,
who indicated to Lessee that it did not incur any initial direct costs. The fair value of the
machinery on 1 January 2009 was R180 000.
The lease agreement stipulates that a deposit of R20 000 is payable on 1 January 2009 and that
instalments of R70 000 each are payable annually in arrears over 3 years, starting from
31 December 2009. The useful life of the machinery is 3 years, at the end of which, the lessor
indicated to Lessee that it is expected to have no residual value.
The machinery was delivered on 1 January 2009 and was immediately available for use. However,
it was only brought into use, in a process of manufacture, on 15 March 2009.
Lessee did not identify its incremental borrowing rate for this lease, as it was able to calculate the
interest rate implicit in the lease, due to the information disclosed by the lessor.
2. On 1 February 2009, Lessee concluded a lease agreement with Lessor (Pty) Ltd for a low value
asset, to which Lessee elected to apply the exemption available in IFRS 16.5. The details of the
lease agreement are as follows:
Instalments:
R2 500 per month for the first 12 months
R1 500 per month for the next 12 months
The abovementioned instalments are paid monthly in arrears. The useful life of the low value
asset is 3 years.
Assume a tax rate of 28%.
Required
Prepare the journal entries Lessee (Pty) Ltd should prepare in order to account for
the above‐mentioned transactions for the year ended 31 December 2009. Journal
entries relating to deferred taxation should also be provided. 20 marks
(Source: MSA tutorial; adapted)