QUESTION 3 (20 MARKS, 36 MINUTES) Corona (Pty) Ltd ('Corona') is a high profile property management company situated at the heart of Mahikeng, North West Province. Corona owns properties, which they sell and lease out to private businesses and government institutions across the North West Province. Virus (Pty) Ltd ('Virus') is a medical supplies company also situated in Mahikeng. Virus specializes in the supply and delivery of surgical health masks to the whole of South Africa's private and public institutions. On 30 June 2019, Virus signed contracts with various provincial and national departments to supply surgical masks. This caused their storage space to be inadequate to house the increased surgical health masks inventories, forcing them to move to a bigger property with adequate storage space. The new contracts to supply surgical health masks are effective from the 1 October 2019. Since the lease of the old storage space was expiring on the 1 October 2019, Virus decided not to renew the lease of the old storage space but rather lease a bigger storage space from Corona. On 1 October 2019, Virus entered into a six months' lease agreement with Corona for the lease of a bigger storage space. The monthly rental payable under the lease agreement varies according to demand of surgical health masks as this affects the storage capacity required by Virus. Both Corona and Virus have a 31 December year-end. The monthly lease payments for the duration of the lease agreement are as follows: Dates Amount (R) 31 October 2019 10 500 30 November 2019 11 000 9 500 8 000 31 December 2019 31 January 2020 29 February 2020 31 March 2020 TOTAL 9 000 10 650 58 650 On 1 April 2020, following the advice received from the finance manager, Virus entered into a new five-year lease agreement for the lease of a property situated at the Mahikeng CBD owned by Corona. The terms of the lease agreement are as follows: Terms Annual instalments in arrears R75 900 Guaranteed residual value R65 000 Unguaranteed residual value R22 500 Lease term Five years Fair value of the property on 1 April 2020 R320 000 Remaining useful life of the property on 1 April 2020 Seven years Purchase option None Additional information Initial direct costs of R11 500 were incurred by Corona for getting the property ready for the five-year lease while initial direct costs of R8 000 were incurred by Virus. These initial direct costs were paid in cash on 1 April 2020. Virus paid a non-refundable deposit of R45 000 on 15 March 2020 to secure the five-year lease of the property. Ownership of the property will not be transferred to Virus at the end of the fifth year. The applicable tax rate remained unchanged at 28%. . REQUIRED: MARKS Total Sub- total (a) Prepare all the necessary journal entries to account for the above leases in the accounting records of Virus (Pty) Ltd for the year ended 31 December 2020. Journal narrations are not required. 20 20 TOTAL MARKS QUESTION 3 20
