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QUESTION 1: SUGGESTED SOLUTION


Part (a)

                                   Accumulated      Financed          Interest capitalised    Interest
                                   Expenditure        via:                 workings           capitalis
                                                                                                 ed
April                                   550 000   Grant: R550 000                                         0.5
                Cumulative Exp          550 000
May                                     912 500   Grant : R150 000                            157 133     0.5
(3 650 000/4)                                     Specific Loan :                              (refer
                                                  R762 500
                                                                                              below)
                Cumulative Exp        1 462 500
June                                    912 500   Specific Loan :                                         0.5
(3 650 000/4)                                     R912 500
                Cumulative Exp        2 375 000
July                                    725 000   Balancing figure                                        1
(3 650 000/4)                                     Specific Loan :
                                                  R725 000
                                                  Specific
                                                  borrowing
                                                  „ceiling‟ reached
                                                  during „2nd half‟
                                                  of July.

                                                  725 000/912 500
                                                  x 31 days = 25
                                                  days .: ceiling
                                                  reached on 25
                                                  July 20.9


                                      3 100 000   (700K +2400K)       15.68% x 187 500 x        242       2
                                        187 500   General Loan:       0.5 x 6/365) (til end               2
                                                  R187 500                  of July)
                Cumulative Exp        3 287 500
August          Average                 456 250   General Loan:        187 500 + 456 250       8 412      1.5
(3 650 000/4)                                     R1 100 000
                                                                           = 643 750
= 912 500                                         (187 500 +
                Balance of costs        456 250   912 500)               x 15.68% / 12
                Cumulative Exp        4 200 000
September       Average                 220 000   General Loan:       1 100 000 + 220 000      17 248     1.5
                                                  R1 540 000
                (440 000/2)                                           = 1 320 000 x
                                                  (1 100 000 +
                Balance of costs        220 000   440 000)            15.68% / 12
                Cumulative Exp        4 640 000
October         Average                  89 125   General Loan:       1 540 000 + 89 125 =     21 287     1.5
                                                  R1 718 250
                (178 250/2)                                            1 629 125 x 15.68%
                                                  (1 540 000 +
                Balance of costs         89 125   178 250)                     / 12
                Cumulative Exp        4 818 250
November        Average                  13 875   General Loan:       1 718 250 + 13 875 =     22 633     2.5
178 250 – 150                                     R1 746 000
                (27 750/2)                                             1 732 125 x 15.68%
500 admin fee                                     (1 718 250 +
                Balance of costs         13 875   27 750)                      / 12
=
 27 750
                Cumulative Exp        4 846 000                                               226 955




                                                      1
QUESTION 1: SUGGESTED SOLUTION


Capitalisation rate
Loan amount No of months                    Interest rate            Interest            Loan
                      loan                                           Expense            weighted
                  outstanding
  R500 000          9 months                      18%                     67 500             375 000       2
    Loan                                                           (500 000 x 18%     (500 000 x 9/12)
                                                                   x 9/12)
 R700 000           12 months                     16%                   112 000              700 000       2
   Loan                                                            (700 000 x 16% )
 R650 000           12 months                     14%                     91 000             650 000       2
 Debentures                                                        (650 000 x 14% )

                                                                        270 500           1 725 000

Capitalisation rate = 270 500/ 1 725 000 = 15.68%                                                          1


Specific Borrowing Costs Capitalised
Borrowing costs incurred for 8    (2 400 000 x 14% x 8/12)                    224 000                      1
month period (April – Nov)
Less: Interest income earned on                                               (66 867)                     1
surplus funds (April – July)
                                                                              157 133
Borrowing costs capitalized
General Borrowings                    Less than actual borrowing               69 822                     0.5
                                      costs = R195 333
Specific Borrowings                                                           157 133                     0.5
                                                                              226 955
                                                                                                         23.5

                                                                                         Maximum          20




                                                        2
QUESTION 1: SUGGESTED SOLUTION


Part (b) - Discussion

In terms of IAS 17.15, the land and building elements of the old factory will need to be            1
considered separately for the purpose of lease classification.

Leases of land and buildings need to be classified as either an operating lease or a finance        1
lease in terms of the lease classification principles of IAS 17.

In order for a lease to be classified as a finance lease, the lessor must transfer substantially    1
all the risks and rewards incidental to ownership to the lessee.

In order to classify the lease over land as either a finance lease or an operating lease, one       1
of the examples of situations which normally lead to a lease being classified as a finance
lease is the „minimum lease payments‟ test. The present value (PV) of minimum lease
payments (MLP) must be determined in order to determine if, at the inception of the lease,
the PV of MLP is equal to substantially all of the fair value of the leased asset.

This “indicator” as per IAS 17 needs to be satisfied (for a finance lease) because, as per          1
the lease agreement, Alsat Limited does not transfer legal ownership of the land to the
lessee at the end of lease term, the lease is not for a major part of the useful life of the land
as land has an indefinite useful life, there is no bargain purchase option and the land is not
of a specialised nature.

In order to calculate the present value of MLPs, the discount rate as well as the separate          1
land and buildings minimum lease payment needs to be determined.


In terms of IAS 17.20, the discount rate to be used is the interest rate implicit in the lease.     1

The implicit interest rate is the discount rate that, at the inception of the lease, makes the      1
aggregate present value of minimum lease payments and the unguaranteed residual value
equal to the aggregate of the fair value of the leased asset and any initial direct costs of the
lessor.

Alsat Limited is a financier type lessor as they do not manufacture or deal (“sell”) in land        1
and buildings.

The interest rate implicit in the lease is calculated by using the combined present values,
future values and payment for both land and buildings.

BEGIN
PV = - [4 000 000 (land) + 15 500 000 (buildings) + 355 000 (initial direct costs) ]=               2
-19 855 000
N = 10                                                                                              0.5
PMT = 2 924 390                                                                                     0.5
FV = 4 000 000 (land) + 3 800 000 (buildings) = 7 800 000                                           0.5
COMPUTE I = 13.5%                                                                                   0.5

Once the interest rate implicit in the lease has been calculated, the minimum lease                 1
payments as per the lease can be allocated between the land and buildings elements in
proportion to the relative fair values of the leasehold interest in the land element and the
building element, at the inception of the lease.

                                                      3
QUESTION 1: SUGGESTED SOLUTION


Land
BEGIN
PV = -(4 000 000 + 71 000 [20% x 355 000]) = - 4 071 000                                         0.5
N = 10                                                                                           0.5
I = 13.5%                                                                                        0.5
FV = 4 000 000                                                                                   0.5
COMPUTE PMT = 487 530

Once the interest rate implicit in the lease and the minimum lease payment applicable to
land has been calculated, the PV of MLP can be calculated for land.
BEGIN
PMT = 487 530                                                                                    0.5
I = 13.5%                                                                                        0.5
N = 10                                                                                           0.5
FV = 0                                                                                           0.5
COMPUTE PV = 2 943 537

PV of MLP accounts for 74% of the fair value of the land of R4M (2 943 537/4 000 000)            1
therefore not substantial enough to be classified as a finance lease, therefore the lease over
land is classified as an operating lease.

Alsat Limited will account for lease income of R487 530 in profit or loss over the lease         1
term of 10 years.

Buildings
Since the lease over buildings is for a major part of the useful life of the building i.e.       1
useful life is 10 years 2 months and lease term is for 10 years, the lease is classified as a
finance lease.

The lease payments relevant to buildings needs to be separated from the total lease
payments based on the fair value of the leasehold interest in the building element, at the
inception of the lease.
BEGIN
PV = -(15 500 000 + 284 000 [80% x 355 000]) = - 15 784 000                                      0.5
N = 10                                                                                           0.5
I = 13.5%                                                                                        0.5
FV = 3 800 000                                                                                   0.5
COMPUTE PMT = 2 436 860
OR balancing figure ie 2 924 390 (total) less 487 130 (land) = 2 436 860

Alsat Limited needs to account for the lease receivable at an amount equal to the net            2
investment in the lease (PV of MLP + unguaranteed residual value) ie R15 784 000 Alsat
Limited will allocate the annual advance lease payment to finance income and a reduction
of the receivable.
BEGIN
N = 10                                                                                           0.5
I = 13.5%                                                                                        0.5
PMT = 2 436 860                                                                                  0.5
FV = 3 800 000                                                                                   0.5
COMPUTE PV = 15 784 000
                                                                                                 27
                                                                                    Maximum      25

                                                     4
QUESTION 1: SUGGESTED SOLUTION


Part (b) – Journal entries
1 February 20.10
Dr Depreciation                                                1 015 152                0.5
Cr Accumulated Depreciation                                                 1 015 152   0.5
[(15.9M – 2.5M) /11 RUL x 10/12 months]                                                  1
Providing for depreciation on factory building

Dr Accumulated depreciation                                    2 233 334                0.5
Cr Buildings                                                                2 233 334   0.5
20.9 - (15.9M – 2.5M) /11 RUL = 1 218 182                                                1
1 015 152 (20.10) + 1 218 182 (20.9)
Reversal of accumulated depreciation against carrying
amount of building before revaluation

Dr Buildings                                                    615 152                 0.5
Cr Revaluation Surplus – OCI                                                 615 152    0.5
(15.9M – 1 015 152 depre) = 14 884 848                                                   1
15.5M - 14 884 848 = 615 152
Revaluation of building before being “sold” in terms of
finance lease

Dr Investment Property                                         4 000 000                0.5
Cr Land                                                                     3 200 000   0.5
Cr Revaluation Surplus – OCI                                                  800 000   0.5
Transfer of land to investment property

Dr Net Investment in Lease/ Lease Receivable (Refer           15 784 000                1
part b – discussion)
(15.5M + 0.284M)
Dr Investment Property (Land)                                    71 000                 0.5
Cr Buildings                                                               15 500 000    1
Cr Bank                                                                       355 000   0.5
Recording of lease receivable in terms of finance lease
over old factory land and building and initial direct
costs

31 March 20.10
Dr Bank                                                        2 436 860                1
Cr Finance Income (15 784 000 – 2 436 860) x 13.5%                           300 311    1
x 2/12
Cr Net Investment in Lease/ Lease Receivable                                2 136 549   1
Recording of lease payment relating to building
received in advance on 1 February 2010 and accruing
for interest income for 2 months

Dr Bank                                                         487 530                 1
Cr Operating lease income (2/12 x 487 530)                                    81 255    1
Cr Income Received in Advance (10/12 x 487 530)                              406 275    1
Recording of lease payment relating to land

Dr Initial Direct Cost (P/L) (71 000/10years x 2/12)              1 183                 0.5
Cr Investment Property (Land)                                                  1 183    0.5
Write off of Initial Direct Cost over lease term

                                                                                        16
                                                                           Maximum      13

                                                          5
QUESTION 1: SUGGESTED SOLUTION


Part (c)

ALSAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS – 31 MARCH 20.10

Note 10:
Property, Plant and Equipment
                                          Land         Buildings        Machinery        Total
                                           R               R                              R
Carrying amount: 1 April                  7 200 000        33 900 000                   41 100 000    2.5
20.9
Buildings: ( 16M + 15.9M +2M)
Land: (3.2M +4 M)
Revaluation (OCI)                         2 450 000         8 799 735                   11 249 735    2
Land: (800 000 +1.650M)
Buildings: (615 152 + 8 184 584)
Transfer to Investment                   (4 000 000)                                    (4 000 000)   0.5
Property
Transfer from Investment                                    2 400 000                    2 400 000    0.5
Property
Additions during the year                 4 350 000         4 372 955     3 000 000     11 722 955    1
Buildings: (calculation below)
Government Grant                                                          (576 440)       (576 440)   0.5
Disposal through finance                               (15 500 000)                   (15 500 000)    0.5
lease
Depreciation                                      0     (2 071 229)                     (2 071 229)   2.5
Buildings:(961 538 [(16M -3.5M)/13] +
 1 015 152 [(15.9M-2.5M) / 11x10/12] +
57 539[4 372 955/304mths x 4 mths] +
25 000 [2M – 1.5M} +
 12 000 [2.4M / 50 x 3/12]
Carrying amount: 31 March                10 000 000        31 901 462     2 423 560     44 325 022    1
20.10

Calculation of building additions
Building construction costs                                             4 996 500                     0.5
Less: administration fee                                                (150 500)                     0.5
Borrowing costs capitalized                                              226 955                      0.5
Less: Government Grant                                                  (700 000)                     0.5
                                                                        4 372 955
                                                                                                      13
                                                                                       Maximum        12




                                                       6
QUESTION 1: SUGGESTED SOLUTION


Part (d)

ALSAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS – 31 MARCH 20.10

Note 11:
Investment Property
                                                                                            R
Carrying amount: 1 April 20.9                                                              15 000 000    0.5
Additions during the year                (2 700 000 + 3 300 000 +3 550 000)                 9 550 000     1
Transfer from property, plant and                                                           4 000 000    0.5
equipment
Initial Direct Cost Capitalised                                                                 71 000   0.5
Transfer to property, plant and                                                            (2 400 000)    1
equipment
Expensing of Initial direct costs        (71 000/ 10years x 2/12)                              (1 183)    1
Fair value adjustment (P/L)              (balancing figure)                                 7 800 000    0.5

Carrying amount: 31 March 20.10          [23 500 000 + 2 950 000 + 7 500 000 +(71          34 019 817    2
                                         000 – 1 183)]
                                                                                                         7
                                                                                           Maximum       6



Part (e)


31 March 20.10
Dr Bank                                                                        2 000 000                 1
CR Loan – Financial Liability                 n=3, i =12,                                   1 423 560    2
                                              FV = R2M
                                              COMP PV
CR Deferred Grant Income                                                                      576 440    1
Accounting for interest-free loan from
government and related government
grant
                                                                                                         4




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