Question 2
Lease
SAXCO Ltd entered into a contract with Bakery SA Ltd on 1 March 2020 whereby Bakery SA Ltd will
lease a specialized oven to SAXCO Ltd. The contract meets the requirements of a lease in terms of
IFRS 16, leases.
The term of the lease are as follows:
Lease term 4 years
Initial payment R144 000
Instalment payable monthly in arrears R20 000
Useful life of oven 6 Years
The lessee’s incremental borrowing rate on 1 March 2020: 8% per annum
The lessee incurred R4 800 legal fees for negotiating the lease. It is impractical for the lessee to
calculate the costs incurred by the lessor and as a result cannot calculate the interest rate implicit in
the lease.
Required
(a) Calculate the right of use asset and the corresponding lease liability for SAXCO Ltd at initial
recognition.
Calculations
Step 1: Calculate the interest rate implicit in the lease.
It is impracticable for the lessee to calculate the interest implicit in the lease. Therefore, the
lessee’s incremental borrowing rate of 8% p.a. must be used.
Step 2: Calculate the PV of the lease liability using the lessee’s incremental borrowing rate.
N : (4 x 12) = 48
PMT : (20 000)
FV : 0
I :8% (0.08/12)
Comp PV : 819 238
Lease Liability
Present value of lease liability at inception of the lease 819 238
Minus payments made on or before commencement date -
Present value of lease payments not paid at lease commencement date 819 238
Step 3: Calculate the right of use asset.
Machine (Oven)
Initial measurement of the lease liability 819 238
Initial direct cost of lease 4 800
Plus: lease payments made at or before commencement date less any
Incentive received 144 000
Estimation of dismantling costs -
968 038
(b) Prepare the journal entries in the accounting records of SAXCO Ltd for the year ended 28
February 2021
SAXCO Ltd
Journal entries for the year ended 31 December 2021
Details Debit Credit
1 March 2020
Right of use asset (SFP) 819 238
Lease Liability (SFP) 819 238
Recognize asset and liability
Right of use asset (SFP) 4 800
Bank (SFP) 4 800
Recognize initial direct cost (Legal fees) as
part of cost of asset
Right of use asset (SFP) 144 000
Bank (SFP) 144 000
Recognize deposit as part of cost of asset
OR
Right of use asset (SFP) 968 038
Lease liability (SFP) 819 238
Bank (SFP) (4 800 + 144 000) 148 800
28 February 2021
Depreciation (P/L) (968 038 / 4) 242 010
Accumulated depreciation (SFP) 242 010
Depreciation for the year
Finance costs (P/L) 58 999
Lease Liability (SFP) 58 999
Total finance costs for the year
Lease Liability (SFP) 240 000
Bank (SFP) 240 000
Total lease payments for the year
OR
Finance costs (P/L) 58 999
Lease Liability (SFP) 181 001
Bank (SFP) 240 000
Total lease payments for the year
Amortization table: Using the PV of lease liability.
Payment date Instalment Capital Interest Balance
1 March 2020 819 238
31 March 2020 20 000 14 538 5 462 804 700
30 April 2020 20 000 14 635 5 365 790 065
31 May 2020 20 000 14 733 5 267 775 332
30 June 2020 20 000 14 831 5 169 760 501
31 July 2020 20 000 14 929 5 071 745 572
31 August 2020 20 000 15 029 4 971 730 543
30 September 2020 20 000 15 129 4 871 715 414
31 October 2020 20 000 15 231 4 769 700 183
30 November 2020 20 000 15 332 4 668 684 851
31 December 2020 20 000 15 435 4 565 669 416
31 January 2021 20 000 15 538 4 462 653 878
28 February 2021 20 000 15 641 4 359 638 237
Total 240 000 181 001 58 999
31 March 2020
Interest: 819 238 x 8%/12 = 5 462
Capital: (20 000 – 5 462) = 14 538
Balance: 819 238 – 14 538 = 804 700
30 April 2020
Interest: 804 700 x 8%/12 = 5 365
Capital: (20 000 – 5 365) = 14 635
Balance: (804 700 – 14 635) = 790 065
31 May 2020
Interest: 790 065 x 8%/12 = 5 267
Capital: 20 000 – 5 267 = 14 733
Balance: 790 065 – 14 733 = 775 332
30 June 2020
Interest: 775 332 x 8%/12 = 5 169
Capital: 20 000 – 5 169 = 14 831
Balance: 775 332 – 14 831 = 760 501
31 July 2020
Interest: 760 501 x 8%/12 = 5 071
Capital: 20 000 – 5 071 = 14 929
Balance: 760 501 – 14 929 = 745 572
31 August 2020
Interest: 745 572 x 8%/12 = 4 971
Capital: 20 000 – 4 971 = 15 029
Balance: 745 572 – 15 029 = 730 543
30 September 2020
Interest: 730 543 x 8%/12 = 4 871
Capital: 20 000 – 4 871 = 15 129
Balance: 730 543 – 15 129 = 715 414
31 October 2020
Interest: 715 414 x 8%/12 = 4 769
Capital; 20 000 – 4 769 = 15 231
Balance: 715 414 – 15 231 = 700 183
30 November 2020
Interest: 700 183 x 8%/12 = 4 668
Capital: 20 000 – 4 668 = 15 332
Balance: 700 183 – 15 332 = 684 851
31 December 2020
Interest: 684 851 x 8%/12 = 4 565
Capital: 20 000 – 4 565 = 15 435
Balance: 684 851 – 15 435 = 669 416
31 January 2021
Interest: 669 416 x 8%/12 = 4 462
Capital: 20 000 – 44 62 = 15 538
Balance: 669 416 – 15 538 = 653 878
28 February 2021
Interest: 653 878 x 8%/12 = 4 359
Capital: 20 000 – 4 359 = 15 641
Balance: 653 878 – 15 641 = 638 237
The right of use asset and corresponding lease liability for SAXCO Ltd at initial recognition are as follows:
Right of use asset: R968,038
Lease liability: R819,238