FAC 3703 ASSIGNMENT 3 2021

The following questions in the table below, have been updated to meet the requirements of IFRS 16 (the new leases accounting standard). Please replace the following questions and solutions in your current tutorial letter 103 (related to leases), with the questions and solutions in this document. Question number Subject Marks Time (minutes) 3 Leases and Employee Benefits 42 76 5 Government Grants, Leases, Borrowing Costs and Segment Reporting 68 122 7 Leases and Government Grants 35 63 10 Leases and Borrowing Costs 58 104 13 Borrowing Costs 23 47 15 Leases and Related Parties 27 49 4 QUESTION 3 (42 marks)(76 minutes) Light-up Ltd, a company that previously manufactured light bulbs could no longer make use of its manufacturing machinery due to a decision taken to import the light bulbs from an overseas company as from 1 July 2015. This serves as a more cost effective method for Light-up Ltd. Light-up Ltd therefore decided to lease its manufacturing machinery to Bright-up Ltd from 1 July 2015. The original cost of the machinery was R492 000 on 1 July 2014. The lease agreement contains a lease in terms of IFRS 16, Leases. The terms of the lease agreement were as follows: Fair value of the machinery (at commencement of lease) R410 000 Instalments payable annually in arrears R125 000 Period of lease 5 years Date of first payment 30 June 2016 Interest rate 16,42% per annum Residual value guarantee by Bright-up Ltd R9 987 Light-up Ltd incurred R15 000 legal fees to secure the lease agreement. The estimated useful life of the machinery on inception of the lease was five years with a residual value of Rnil. At the end of the lease term, ownership of the machinery will be transferred to Bright-up Ltd, after payment of the guaranteed residual value. Light-up Ltd provides for depreciation using the straight-line method over the useful life of the machinery, which is in agreement with the allowance by the South African Revenue Service. Light-up Ltd’s gross monthly salaries for 1 January 2015 to 31 December 2015 amounted to R400 000 per month. The salaries and wages of employees are subject to a 10% increase, which takes place at the beginning of each calendar year. Light-up Ltd also has a policy of paying out bonuses (13th cheque) at the end of each calendar year based on the salaries for December of that calendar year. The employees of Light-up Ltd are entitled to 20 working days paid vacation leave per year. The leave cycle ends on 30 June of each year. Ten days may be carried forward to the next cycle and may then be taken during that cycle or paid out on 31 July of that cycle. If the leave has not been taken or paid out at the end of the second cycle, it will lapse. The foll