QUESTION 1 (35 Marks) Part a (25 Marks) On 1 January 2010 Sleepless Ltd purchased 2 factory buildings one in Independence street and another in Mandume Ndemufayo Road, for N$250 000 each. Both factory buildings were initially to be used to manufacture beds for sale to retail stores. The buildings are not specialised and could be used for a variety of manufacturing processes. The estimated useful life of each building is 15 years with no residual value. Sleepless Ltd lost a major customer effective 1 January 2015 and as a result, had surplus factory space for their requirements. Sleepless Ltd enters a contract to lease the factory building in Mandume Ndemufayo road to a tenant with a commencement date of 1 January 2015. The lease term is 5 years. The rental payments are N$100 000 per year, payable annually in arrears and are to be increased by 20% per year over the lease term. The buildings will revert to Sleepless Ltd at the end of the contract Sleepless Ltd holds all investment property under the cost model. Required: 1.1 Discuss briefly whether Sleepless Ltd should classify this lease contract as a finance or operating lease 5 1.2 Record journal entries of the factory building in Mandume Ndemufayo Road for 20 the year ended 31 December 2015,2016,2017,2018 and 2019. TOTAL 25 Part b (10Marks) Point to Point Ltd provides a service, transporting passengers from Hosea Kutako International Airport to hotels in Windhoek City and the surrounding areas. It enters a contract with Bust Ltd for the lease of five, 25-seater buses for a period of 3 years. The lease payments are constant over the lease term. The market for airport transfer is constantly changing and Point to Point Ltd may need to use similar 25-seater buses or large 40-seater buses, depending on whether other models of transport become available or not. As such the contract allows Point to Point Ltd to cancel the lease at the end of the 15 year or at the end of the 2nd year without any penalty Required: Page 2 of 4 1.3 Discuss with reference to IFRS 16 Leases:how Point to Point Ltd should account 10 for this lease contract