CASE STUDY [30 MARKS)

This case study consist of two independent parts Read the Case Study below and answer the questions that follow:

PART A (10 Marks)

A customer enters into a contract that conveys the right to use an explicitly specified retail unit for a period of five years. The property owner can require the customer to move into another retail unit; there are several retail units of similar quality and specification available. As the property owner has to pay for any relocation costs it can benefit economically from relocating the customer only if there is a new tenant that wants to occupy a large amount of retail space at a rate that is sufficient to cover the relocation costs. Those circumstances may arise, but they are not considered likely to occur.

The contract requires the customer to sell his goods during the opening hours of the larger retail space. The customer decides on the mix of goods sold, the pricing of the goods sold and the quantities of inventory held. He further controls physical access to the retail unit throughout the five-year period of use. The rent that the customer has to pay includes a fixed amount plus a percentage of the sales from the retail unit.

Required:

Does the contract contains a lease or not?

PART B (20 Marks)

SunnySide (Pty) Ltd (SunnySide) is a cap manufacturer based in sunny Mpumalanga. Their financial year end is 31 December. On 1 January 2017 SunnySide bought a property for R2 500 000 (20% for land and 80% for buildings). This was correctly classified as property, plant and equipment in the books of SunnySide as they used the building in their production process. On 1 January 2011, SunnySide decided it would change its intentions, and lease the land and building to one of their competitors. The fair value on this date was the same as the fair value on 31 December 2018.

The fair value of the land and buildings at various dates are as follows (20% for land and 80% for buildings):

31 December 2017: R2 550 000

31 December 2018: R2 800 000

31 December 2019: R3 000 000

Additional information:

SunnySide carries all investment property using the fair value model.

SunnySide carries all property, plant and equipment using the cost model.

Depreciation is provided on a straight-line basis. The useful life of the building on 1 January 2017 was estimated to be 20 years with a residual value of zero. There have been no changes to this useful life or residual value.

SARS allows a S13 allowance on the buildings at 4% per annum, not apportioned. No allowances are granted on land.

The applicable tax rate is constant at 28% (inclusion rate for capital gains tax is 50%). You may assume that there is no limitation on the recognition of deferred tax assets. Ignore VAT.

Required: Prepare all the journal entries to account for the above transactions in the books of Sunnyside for the financial year ended 31 December 2019. Clearly indicate whether each entry is accounted for in profit or loss (P/L), other comprehensive income (OCI), statement of changes in equity (SCE) or statement of financial position (SFP). Journal entries are required.