INTERMEDIATE 5

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```					Advanced Accounting                                              Week 11: Lessee – Lessee Accounting

7.7                                 Lease over land and buildings                           (1 Page only)

On 1 January 20.5, Zap Limited entered (as lessee) into a lease over the land and factory buildings
from which it operates.

Terms of the lease are as follows:
o Twenty-year non-cancellable lease;
o Lease payments of R600 000 per annum are payable annually in advance on 31 December of
each year of the lease (except for the first payment that is made on 1 January 20.5). Sixty
percent of the lease payments are attributable to the building and forty percent to the land;
o The interest rate implicit in the lease is 10%.

On 1 January 20.5, both the lessee and the lessor considered the remaining useful life of the factory
building to be twenty years.

The fair value of the land on 1 January 20.5 was R5 000 000.

Ownership of the land and buildings does NOT pass to the lessee at the end of the lease.

Zap Limited has a 31 December year-end.

Required:
Prepare the journal entries (including cash entries) to account for the lease and the leased assets in the
accounting records of Zap Limited for the years ended 31 December 20.5 to 31 December 20.23.

Ignore all forms of taxation.
Advanced Accounting                                                      Week 11: Lessee – Lessee Accounting

SUGGESTED SOLUTION TO 7.7 ADVANCED                                                              (Page 1 of 2)

Calculation:                    Rand
1 January 20.5
Property, plant & equipment - cost                        Financial calculator set to BGN:       3 371 371
Finance lease liability                              R360 000 = PMT; 20 = n; 10 = i; COMP PV    (3 371 371)
The R360 000 is 60%(R600 000 payment)
Acquisition of building under finance lease

Finance lease liability                                          60%(R600 000)                    360 000
Operating lease expense                                          40%(R600 000)                    240 000
Bank                                                                                            ( 600 000)
Initial lease payment

31 December each year to 20.23
Prepayment of operating lease                                    40%(R600 000)                    240 000
Finance lease liability                                          60%(R600 000)                    360 000
Bank                                                                 Given                      ( 600 000)
Analysis of lease payment

During each subsequent year (including 20.24)
Operating lease expense                                               Above                       240 000
Prepayment of operating lease                                                                   ( 240 000)
Expensing of prior period’s prepaid operating lease expense

Depreciation – Finance Leased Building                           3 371 371 / 10 years             168 569
Accumulated Depreciation                                                                        ( 168 569)
Depreciation of Finance Leased Building (to 31.12.20.24)

31 December 20.5
Finance costs (expense)                                               (W1)                        301 137
Finance lease liability                                                                         ( 301 137)
Finance cost for the year

31 December 20.6
Finance costs (expense)                                               (W1)                        295 251
Finance lease liability                                                                         ( 295 251)
Finance cost for the year

31 December 20.7
Finance costs (expense)                                               (W1)                        288 776
Finance lease liability                                                                         ( 288 776)
Finance cost for the year

31 December 20.8
Finance costs (expense)                                               (W1)                        281 653
Finance lease liability                                                                         ( 281 653)
Finance cost for the year

31 December 20.9
Finance costs (expense)                                               (W1)                        273 819
Finance lease liability                                                                         ( 273 819)
Finance cost for the year

Etc to 31 December 20.23
Advanced Accounting                                               Week 11: Lessee – Lessee Accounting

SUGGESTED SOLUTION TO 7.7 ADVANCED                                                          (Page 2 of 2)

(W1) Amortisation table:

Date               Finance cost            Payment                 Balance
1 January 20.5                                                         3,371,371
1 January 20.5                                  -360,000               3,011,371
31 December 20.5            301,137               -360,000               2,952,508
31 December 20.6            295,251               -360,000               2,887,759
31 December 20.7            288,776               -360,000               2,816,535
31 December 20.8            281,653               -360,000               2,738,188
31 December 20.9            273,819               -360,000               2,652,007
31 December 20.10           265,201               -360,000               2,557,208
31 December 20.11           255,721               -360,000               2,452,929
31 December 20.12           245,293               -360,000               2,338,222
31 December 20.13           233,822               -360,000               2,212,044
31 December 20.14           221,204               -360,000               2,073,248
31 December 20.15           207,325               -360,000               1,920,573
31 December 20.16           192,057               -360,000               1,752,630
31 December 20.17           175,263               -360,000               1,567,893
31 December 20.18           156,789               -360,000               1,364,682
31 December 20.19           136,468               -360,000               1,141,150
31 December 20.20           114,115               -360,000                895,265
31 December 20.21            89,527               -360,000                624,792
31 December 20.22            62,479               -360,000                327,271
31 December 20.23            32,729               -360,000                   0

(W2) Lease of Land:

Calculation of minimum lease payments of land =

BEGIN
PMT = 240 000 (600 000 x 0.4)
I   = 10%
N = 20
FV = 0
COMPUTE PV = 2 247 581

2 247 581/ 5 000 000 fair value = 45%

Since the present value of minimum lease payments is not equal to substantially all of
the fair value of land, at the inception of the lease, the lease over land is a operating
lease

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