FRS 16 leases defines a lease as A contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration.

Mulongo Ltd is a Pizza maker and offers delivery service to its clients at an additional fee. Mulongo Ltd enters into a 5 year contract with BiBi Bikes for the right to use two of its motor bikes per week that will be used for its deliveries. BiBi Bikes has allocated Bike Y and Bike Z for this purpose. BiBi Bikes will be required to provide any other Bike to Mulongo Limited in times when Bike Y and Bike Z are being serviced by BiBi Bikes. Mulongo Ltd will be able to use the Bikes on any route and at any time to make deliveries but BiBi Bikes has restricted Mulongo on using the Bikes to carry any other goods rather than Pizzas. Mulongo is prohibited from using other drivers for motor bikes other than those registered with BiBi Bikes upon entry into this agreement. The average age of the Bikes is 6 years as estimated by BiBi Bikes.

Required:

In accordance with the provisions of IFRS 16, discuss whether a lease contract exists between Mulongo and BiBiBikes or not.(10 marks)

b) On 1 March 2020, Muluwe entered into a lease agreement to rent an item of plant from Liseli Ltd, a company specialized in leasing non current assets to business houses in Kitwe. The terms of the agreement were that Muluwewould pay 3 rentals of K38,000 per annum in advance commencing on 1 March 2020 with an option to extend the lease term for a further 2 years for rentals of K45,000 per annum in advance in the optional period. Muluwe is uncertain it would continue, to use the plant in the optional period. The plant has a useful economic life of 10 years.

To obtain the lease, Muluwe incurs initial direct costs of K15,000 arising from legal fees related to the transaction. The lessee received lease incentives amounting to K4,000from the lessor. The lease does not provide for the transfer of title of leased asset to the lessee at the end of the lease term.

Muluwes cost of borrowing is 8%.

Required:

Explain the required accounting treatment of the above transaction in the books of Muluwe Ltd for the years ended 31 March 2021 and 31 March 2022.

Note: Your answer must include financial statement extracts for the two years.