QUESTION 4 (FINANCIAL INSTRUMENTS- IAS39- IFRS9) (50 marks) ABC Limited, a specialized leasing company, enters a lease contract with Magic Clinics Limited on 1 July 2015 for the lease of specialized radiology equipment. The contract stipulates that the lease is for five years and is non-cancellable.

The equipment was purchased by ABC Limited on 1 July 2015 for R497 996, which is also the fair value at the commencement of the lease. The equipment has an estimated useful life of six years and an estimated residual value of R90 000. The equipment is depreciated on a straight-line basis.

The lease agreement has a purchase option that gives the lessee the option to purchase the equipment at the end of the fifth year for R20 000.

Five lease payments of R150 000 are to be made annually, in arrears, the first being made on 30 June 2016. Each payment of R150 000 includes R15 000 for the maintenance of the equipment, borne by the lessor.

The interest rate implicit in the agreement is 12%. The following present value table is provided with the factors.

Annuity in arrears of C1 for five years, discounted at 12% 3,6048

Present value of C1 in five years, discounted at 12% 0,5674 Required:

a) Prove that the rate of interest implicit in the lease is 12%. (10) marks

b) Prepare the journal entries in the accounting records of ABC Limited for the years ending 30 June 2016 and 30 June 2017, recording the gross receivable and the unearned finance income. (20) marks

c) Prepare the journal entries in the accounting records of ABC Limited for the years ending 30 June 2016 and 30 June 2017, recording the net receivable. Ignore tax (20) mark