QUESTION 4
10 marks
The following information pertains to Sesame Ltd, a listed company with a number of divisions, for the year ended 31 December 2005:
Warehouse operating lease A warehouse that has been occupied by Sesame Ltd is leased under an operating lease. Because of continued break-ins Sesame Ltd relocated its warehousing operations to a new warehouse, 24 km from the old location. The relocation took place in December 2005. The lease on the old warehouse still has three years to run and cannot be cancelled nor can it be sublet to another tenant. The accountant proposes that the monthly operating lease rental on the old and new warehouses continue to be expensed in the income statement. This expense will easily be recovered by savings that will result from the relocation.
REQUIRED Discuss the proposed accounting treatment for the warehousing operating lease in the 2005 financial statements of Sesame Ltd. If any aspect of the proposed accounting treatment is not acceptable indicate, with reasons, what the correct treatment should be. Presentation TOTAL MARKS
Marks
9 1 10
8