Question
Game Ltd is a tourism company that transports passengers in and out of the Kruger National Park. Game Ltd has a 28 February year-end. Leasing
Game Ltd is a tourism company that transports passengers in and out of the Kruger National Park. Game Ltd has a 28 February year-end.
Leasing of old motor vehicle
On 1 May 2018, Game Ltd decided to lease out one of its game drive vehicles because of a decline in tourist numbers. On 1 June 2018 Game Ltd entered into a contract with Raptor Ltd to lease the game drive vehicle to Raptor Ltd. The contract contains a lease in terms of IFRS 16, Leases. Game Ltd paid legal fees of R12 000 to its attorneys in order to facilitate the conclusion of the lease agreement and Raptor Ltd incurred costs of R8 000 to modify the game drive vehicle for use by its customers.
The terms of the lease agreement are as follows:
The fair value of the game drive vehicle on 1 June 2018 R550 000 Lease commencement date 1 June 2018 Bi-annual installments payable in arrears (starting at 30 November 2018) R68 000 Lease term Five years Incremental borrowing rate of Raptor Ltd 11% per annum
Bay Ltd, a company that is not related to either Game Ltd or Raptor Ltd, has made a firm commitment that it will purchase the game drive vehicle leased to Raptor Ltd at a guaranteed amount of R150 000 at the end of the lease term. Bay Ltd is able and capable of discharging its obligations under the guarantee agreement.
The game drive vehicle was originally purchased by Game Ltd on 1 December 2013 for R800 000. Game Ltd depreciates the game drive vehicle over its useful life of seven years using the straight-line method. The residual value of the game drive vehicle for depreciation purposes was estimated at R100 000.
Raptor Ltd has a 30 November year-end. It is the accounting policy of Raptor Ltd to depreciate the game drive vehicle over its useful life of five years using the straight-line method. On 1 June 2018, the residual value of the game drive vehicle for depreciation purposes was estimated at R60 000.
Debentures
On 1 February 2019, Game Ltd issued 10 000 debentures at their par value of R50 per debenture in order to raise funds for expanding its operations. Interest is payable annually on 31 March at a nominal interest rate of 9% per annum. At the end of seven years, each debenture is convertible, at the option of Game Ltd, into two ordinary shares or the debentures can be redeemed for cash at a value of R65 each. On 1 February 2019, the prevailing market interest rate for similar debt instruments without a conversion option was 12,5% per annum.
FAC3703/101
(a) Prepare the journal entries to account for the lease of the game drive vehicle in the accounting records of Game Ltd for the year ended 28 February 2019.
(b) Prepare the journal entries on 1 June 2018 to recognize the lease of the game drive vehicle in the accounting records of Raptor Ltd.
(c) For parts (a) and (b) above: Provide the date of each journal. ( Journal narrations are required.)
(d) With regard to the debentures, discuss the initial recognition and calculate the initial recognition amounts in the accounting records of Game Ltd.
Step by Step Solution
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a 1st June 2018 Legal fee R12000 Cash R12000 Legal fee was paid which will be debited ...Get Instant Access to Expert-Tailored Solutions
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