Financial Accounting

Question 2 (25,5 marks) ( 46 minutes) Turner Industrial Ltd (Turner) is a company that operates in the commercial drill manufacturing industry, selling drilling equipment to end users. The financial year end of the company is 31 December. Due to the tough economic environment, rising interest rates and competition in the industry, Turner had been struggling to increase sales which resulted in profit margins falling. The financial director structured lease deals that will be competitive in the market to increase sales. On 1 January 2021, Turner entered into an agreement in which Turner leased an All Geared Extra Heavy Duty Radial Drill to Impact Industries Ltd (Impact). The lease agreement contains a lease in terms of IFRS 16, Leases. The terms of the lease are as follows: - Commencement date: 1 January 2021 - Lease period: 3 years - Lease payments: R80 000, annually in advance, payable on 1 January of each year - Guaranteed residual value: R10 000, payable on 31 December 2023 - Interest rate as quoted: 18,7927% - Legal fees incurred by Turner: R5 000 - Ownership of the asset will pass to Impact at the end of the lease term at no cost. The drill was manufactured at a cost of R180 000. The normal selling price of the drill is R210 000 and the fair value is R235 000 . The economic life of the asset is 4 years. The market related interest rate for similar lease agreements is 22%