FAC3703 Assignment 1 Due 7 September 2024 (Detailed Answers)

FAC3703


Assignment 1


Semester 2


DUE 7 September 2024

, Question (a):
Journal Entries for Transaction 1 in the Accounting Records of Woodworks
Ltd
To account for the lease transaction between Ozone Ltd and Woodworks Ltd under
IFRS 16, "Leases," Woodworks Ltd, as the lessee, must recognize a right-of-use
(ROU) asset and a corresponding lease liability at the commencement date of the
lease (1 March 2023). The lease liability is initially measured at the present value of
the lease payments to be made over the lease term, discounted using the interest
rate implicit in the lease (if available) or the lessee’s incremental borrowing rate. The
ROU asset is initially measured at the amount of the lease liability, adjusted for any
lease payments made at or before the commencement date, initial direct costs, and
any estimated costs to dismantle and remove the underlying asset or restore the site
on which it is located.


Journal Entries:


Recognition of Right-of-Use Asset and Lease Liability (1 March 2023):
Debit: Right-of-Use Asset (ROU) – R400,000
Credit: Lease Liability – R400,000
The ROU asset is recognized at the commencement date at the same amount as the
lease liability. The lease liability is calculated as the present value of future lease
payments.


Payment of Initial Direct Costs (1 March 2023):
Debit: Right-of-Use Asset – R15,000
Credit: Bank/Cash – R15,000
Woodworks Ltd incurs initial direct costs (legal fees) of R15,000, which are added to
the ROU asset.


Lease Payment (31 July 2023):
Debit: Lease Liability – R90,000
Credit: Bank/Cash – R90,000
The first lease payment is made by Woodworks Ltd on 31 July 2023.