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Chappo Limited is the largest seller of bird of food in Namibia. Chappo Limited enters into a contract for the lease of a machine with
Chappo Limited is the largest seller of bird of food in Namibia. Chappo Limited enters into a contract for the lease of a machine with Pako Limited that will automate the entire packaging process. The lease is non-cancellable, Chappo Limited will make all decisions on how to use the machine and Pako Limited does not have substitution rights. The contract is, entered into on 1 January 2020 for the period of four (4) years and requires Chappo Limited to pay lease rentals of N 5200755 annually, in advance. The interest rate implicit in the lease is 10% and the present value factor is 3.48684 . The economic useful life of the machine is 4 years with no residual value. Chappo Limited uses cost model to account for its assets on straight line basis. Chappo Limited's profit before tax is calculated at N$900000 in 2020 before taking into account adjustments relating to the lease machine above. The tax authorities allow a deduction relating to interest expense of the leased assets from taxable profits. Chappo limited year end is 31 December. The current tax rate is 30%. Required: a) Determine whether the lease entered into by Chappo Limited constitute a lease or not in terms of IFRS 16. ( 5 Marks) b) Prepare the journal entries for the year ended 31 December 2020 in relation to the above lease agreement. You may show the lease obligation amortization schedule for the 4 years or workings to supporting your figures. (15 Marks) c) Prepare an extract from the statement of comprehensive income of Chappo Limited for the year ended 31 December 2020. d) Prepare an extract from the statement of financial position of Chappo Limited for (5 Marks) the year ended 31 December 2020
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