QUESTION 1 |26 MARKS A 3-year lease is initiated on January 1, 2017 for equipment with an expected useful life of 6 years. The Lessor is Supreme Asset Management Company (SAMC) and the lessee is Bogue Distributors Limited (BDL). The equipment reverts to SAMC upon expiration of the lease agreement. Three Payments are due to SAMC in the amount of $180,000 per year beginning December 31, 2017. An additional sum of $12,000 is to be paid annually by BDL for insurance. BDL guarantees a $20,000 residual value on December 31, 2019 to SAMC. The leased asset is expected to also have a $20,000 salvage value on December 31, 2019; therefore, the asset should be depreciated down to the $20,000 expected residual value. The lessee's incremental borrowing rate is 14% (and the lessor's implicit rate is 12%). Year 1 Year 2 Year 3 PVIFA 14% PVIFA 12% 0.8772 0.8929 0.7695 0.7972 0.6750 0.7118 Required: a) Explain the difference in the accounting treatment for a finance lease and an operating lease under IFRS 16 (7 mark) b) Record all the journal entries in the books of the BDL over the life of the lease supported by the relevant calculations). (17 marks) c) What are the total cash payments made by the BDL over the life of the lease? (2 marks) QUESTION 3 126 MARKSI PARTA The following information relates to the financial statements of Clarendon Enterprise Limited (CEL) for the year to 31 March 2019. The mining division of CEL has a 3 year operating licence from an overseas government(Suriname). This allows it to mine and extract copper from a particular site. When the licence began on 1 April 2018, CEL started to build on the site. The cost of the construction was $ 7,000,000. Suriname has no particular environmental decommissioning laws. In its past financial statements CEL has given information about the company's environmental policy and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be $ 2,000,000. The capitalized cost of the site currently shown in the trial balance is $ 7,000,000. The company has a cost of borrowing of 10%. REQUIRED: Explain the correct accounting treatment for the scenario above with appropriate calculations as necessary. (20 marks) Hint: Within your answer you must clearly explain provisions and obligations under IAS 37and the accounting treatment of any calculations made. PART B The directors of Clarendon Enterprise Limited (CEL)are uncertain of the difference between a provision and a contingent liability, Write a brief explanation explaining both concepts to give them clarity, (6 marks) QUESTION 2 22 MARKSI a) Differentiate between redeemable preference shares and irredeemable preference shares and state how each type should be accounted for in the financial statements of a company. (4 marks) b) Define compound financial instruments and explain how they should be accounted for in the financial statements of any entity according to the relevant IFRS. (6 marks) c) Hanover Enterprise Limited (HEL) issued $6,000,000 convertible debentures at January 1, 2019. The debentures have a four-year term, and interest is payable annually in arrears at a nominal annual interest rate of 10% percent. When the debentures were issued, the prevailing market interest rate for similar debt without conversion options was 14 %. The following discount rates are available: End of year Year 1 Year 2 Year 3 PVIFA 10% PVIFA 14% 0.9091 0.8772 0.8264 0.7695 0.7513 0.6750 0.6830 0.5921 Lyear 4 Required: In relation to the convertible debentures disclosed above, prepare extracts of the entity's statement of profit or loss and statement of financial position for the year ended December 31, 2012. (Show all workings.) (12 marks)