Question 1 (20 Marks) Medical Marvels Ltd (hereafter referred to as Medical Marvels) is a listed South African company that operates in the private healthcare sector. The company has a 31 December year end. During the previous year the company began providing third party disease and affliction screening services for patients of large private hospitals in South Africa. Patients are referred to Medical Marvels to be screened for, amongst other conditions, HIV, cancer and diabetes. In order to provide for these services, Medical Marvels needed to obtain medical equipment that carries a significant price tag. Unfortunately they had insufficient cash reserves readily available to pay for the medical equipment upfront. The company did, however, have fairly stable cash flows. In lieu of this, the directors of the company made a decision to lease the required medical equipment. In February 2021, a long standing director of Medical Marvels contacted OCD Medical Equipment (Pty) Ltd with regards to leasing five industrial strength Disease Screener Deluxe model XL (DSD/XL) screeners. The terms of the lease were agreed upon on 31 March 2021. The main features of the contractual arrangement were as follows: Ownership of the DSD/XL screeners would at all times during the lease remain the property of OCD Medical Equipment. At the end of the lease, Medical Marvels would automatically become the owner of the DSD/XL screeners. The lease term would be for 5 years. Equal payments would be made in arrears on a monthly basis, commencing 31 August 2021. The interest rate implicit in the lease is 25% per annum. The cash cost of all five the DSD/XL screeners together, is R11 011 101. The DSD/XL screeners would be delivered to Medical Marvels on 1 August 2021. The lessee would have the option to shorten, but not lengthen, the term of the lease subject to a minimum lease period of 3 years in total. The DSD/XL screeners have useful lives of 6 years. During the first few months of 2022, the cash position of Medical Marvels improved and the directors decided to increase the monthly payments and decrease the period of the lease to the minimum possible length (as from 1 March 2022), in order to save on interest costs over the remaining period of the lease. OCD Medical Equipment agreed to reduce the total lease period to 3 years the termination of the lease would thus now be on 1 August 2024. The lease was changed with effect from 1 March 2022 and the interest rate implicit in the lease remained unchanged at 25% per annum. Provide the journal entries to correctly account for the lease in the accounting records of Medical Marvels Ltd for the year ended 31 December 2022. You may assume for this part of the question that the lease is appropriately classified as a lease. Ignore the effects of taxation and VAT. Journal entries must be dated and briefly narrated. Since marks are awarded for them, you should show all of your calculations clearly and cross reference them to your answer.

STEP 1: Calculate the amortisation schedule for the period 01/01/2022 to 29/02/2022, before the change in the terms of the lease based on the original (unchanged) lease terms. STEP 2: The number of years will change, then calculate what the years will be after the change. STEP 3: Calculate the amortisation schedule for the period 01/03/2022 to 31/12/2022 based on the new years and the remaining balance before the change. STEP 4: Calculate the total interest expense and amount of the principal that is paid off. Prepare the journals