REQUIRED Discuss whether GoMart Ltd's contract with GoBag Ltd is a lease in terms of IFRS 16 Leases. [15] PART B Carspares Limited, a manufacturer of automotive components for both local and foreign car manufacturers, is listed on the Johannesburg Stock Exchange. On 1 January 2014, Carspares Limited entered into a lease agreement with Jones Limited the lessor, for the use of a large storage facility at Best Industrial Park outside Johannesburg. The lease was for a period of six years with an option to extend the lease for a further four years. At the commencement of the lease, Carspares Limited was not reasonably certain that it would exercise the renewal option to extend the lease beyond the initial six-year term of the lease. On 1 January 2014, Carspares Limited paid initial direct costs of R25 000 relating to the lease and a further amount of R60 000 for leasehold improvements to the storage facility. In terms of the lease agreement, the annual lease payments were as follows: - R320 000 at the commencement of the lease on 1 January 2014; - R150 000 payable annually thereafter during the next five years of the initial six-year term of the lease; and - R180 000 payable annually thereafter in advance during the renewal period commencing on 1 January 2020. The interest rate implicit in the lease was not determinable. Carspares Limited's incremental borrowing rate at the commencement of the lease was 11% per annum, which reflected the equivalent risk on future borrowings by Carspares Limited. Towards the end of the 2017 financial year, Carspares Limited's rapidly expanding business prompted the company to reconsider its storage capacity in the area. To this end, the directors of Carspares Limited made a formal decision on 1 January 2018 to exercise the option to extend the original lease for the renewal period of four years to a total lease term of 10 years. On 1 January 2018, Carspares Limited's incremental borrowing rate was 10% per annum. REQUIRED 1. Briefly discuss how Carspares Limited should account for the decision of its directors regarding the storage facility lease on 1 January 2018, in accordance with International Financial Reporting Standards. (5) REQUIRED: Calculate the amount at which the buildings will initially be measured at. Support your answer with appropriate explanations in terms of IAS 40 . (10 marks) Question 3 [25] Grazed Limited, a South African company placed an order for inventory from Go Green Limited, a company based in the U.S. The inventory was invoiced for $220000. The goods were loaded free on board (FOB) on 25 March 2019 and arrived in South Africa on 5 April 2019. Grazed Limited agreed to pay Go Green Limited in two equal instalments on the 31 May 2019 and 31 August 2019. As at 30 June 2019,65% of the inventory was sold locally for cash. The remaining inventory was sold for cash during the year ending 30 June 2020. Grazed Limited has a 30 June year end. The relevant exchange rates are as follows: REQUIRED:- Prepare the journal entries of Grazed Limited for the years ended 30 June 2019 and 30 June 2020. Please include dates and narrations. Question 4 [25] On 1 January 2011, Marine Limited took delivery of its newly constructed luxury ocean-liner (African Queen II) at a cost of R5 000 million. Marine Limited has operated numerous luxury ocean-liners across the seven seas of the world for over fifty years and in order to maintain its reputation as the most elite of ocean-liners it replaces its ocean-liners every ten years even Question One [30] This question comprises two independent parts. PART A GoMart Ltd (GoMart) is a diversified utility, manufacturing and supermarket retailer company based in Cape Town. You are furnished with the following information in respect of GoMart Ltd's annual financial statements for the year ended 31 December 20.8: GoMart's supermarket division, Save Supermarkets, has opened the country's largest superstore in Durban and has arranged for GoBag Ltd (GoBag) to supply their plastic bag requirements for the superstore with effect from 1 January 2019. The agreement is for a four-year period and the terms are as follows: - GoBag Ltd will set up a new bag-making machine in a warehouse located close to and dedicated to the Durban Superstore of GoMart. The bag-making machine will be owned and operated by GoBag. The contract stipulated the type and quality of bags to be supplied by GoBag to GoMart. - GoBag Ltd has the right to use the machine for other bag orders but that is considered unlikely as it is designed and set up to produce bags that are unique to the Save Supermarkets superstore. - Save Supermarkets will purchase a minimum of 1 million bags per month. It is expected that normal demand will be in the region of 1.5 million bags per month with the maximum output capacity of the bag-making machine being 1,6 million bags per month. - In terms of the contract, GoBag operates and maintains the bag-making machine and makes the ultimate decision in terms of its operation, use, maintenance and possible modification for a change in use. 2. Prepare journal entries to reflect all matters relating to the lease in the accounting records of Carspares Limited for the year ended 31 December 2018. Entries relating to depreciation and taxation are NOT required. [10] Question 2 [20] This question comprises two independent parts. PART A Space Limited owns an office park that it developed during the current reporting period at a cost of R200 million. Space Limited's head office is situated in the office park in a standalone building. The balance of the office park is let out to tenants under non-cancellable operating leases that vary in duration between 3 and 5 years. Space Limited intends keeping the office park in its existing use indefinitely. Required: Write a letter to the financial director of Space Limited in which you set out how Space Limited should account for the office park. Limit your discussion to the recognition and measurement issues (i.e. ignore presentation and disclosure). Ignore all taxation. [10] PART B GCG (Pty) Ltd acquired three two-storey buildings with a view to renting them out. The following costs were incurred in acquiring the buildings: though the economic life of ocean-liners is proven to be approximately fifty years. The residual value of African Queen II was appropriately determined to be: R4 000 million on 31 December 2016, 2017 and 2018; R4 850 million on 31 December 2019. On 31 December 2020, because of declining demand for ocean-liner services resulting from the extended global economic downturn arising from world Covid 19 Pandemic, Marine Limited decided that it would continue to use African Queen II for a further ten years (ie a total useful life of 15 years). On 31 December 2020, the fair value of an equivalent ocean-liner that is: 5 years old is R3 200 million, 10 years old is R3000 million, and 15 years old is R2 000 million. If Marine Limited was to sell the African Queen II on 31 December 2020, selling expenses of R320 million would be incurred. At 31 December 2020, Marine Limited appropriately estimated the expected future net operating cash flows of keeping the African Queen II in use to be an inflow of R500 million per annum and that the African Queen II will realise upon disposal R2 500 million (net of disposal costs) ten years hence (ie on the expected date of disposal). An appropriate discount rate is 9% per annum. Required: Discuss how Marine Limited should account for the African Queen II in its 31 December 20.5 company financial statements. Your answer should be limited to the recognition and measurement issues only (ie ignore presentation and disclosure)