Question

his is a mixed question in which you need to provide answers for the questions below that are based on the measurement of leases and right-of-use assets. Kingtoy Ltd entered into a contract with Racer Ltd whereby Racer Ltd will provide the company with a manufacturing plant that will produce go-karts petrol tanks in line with new regulations. The contract met the requirements of a lease in terms of IFRS16 Leases and the manufacturing plant can be considered as an identified asset. The contract was signed on 20 December 2014, while the manufacturing plant would be delivered to Kingtoy Limited on the 1 January 2015 and the manufacturing plant will be installed on Kingtoy Limited’s premises on this day. The term of the contract is 5 years and equal instalments of R250 000 will be paid annually in arrears on 31 December. The fair value of the manufacturing plant on the date of signing the contract is R879 308 with a residual value of R30 308. The implicit interest rate in the contract is 13%. The expected useful life for this machine is estimated at 6 years. Kingtoy Limited will obtain ownership at the end of the lease term. The following amortisation schedule is applicable to the abovementioned agreement: Effective interest (13%) Instalment Balance R R R 1 January 2015 - - 879 308 31 December 2015 114 310 -250 000 743 618 31 December 2016 96 670 -250 000 590 288 31 December 2017 76 737 -250 000 417 026 31 December 2018 54 213 -250 000 221 239 31 December 2019 28 761 -250 000 - REQUIRED: Prepare the journal entries to the above contracts in the general journal of Kingtoy Limited for the reporting period ended 31 December 2015.

Answer 1

Kingtoy Limited's journal entries for 2015 reflect the lease liability's initial recognition and measurement adjustments, payments toward the liability, and the depreciation of the right-of-use asset based on its expected useful life of 6 years.

Step-by-step explanation:

The journal entries for Kingtoy Limited for the reporting period ended 31 December 2015, according to IFRS 16 Leases, involve recording the initial recognition of the lease liability and right-of-use asset, subsequently measuring the lease liability, and the corresponding depreciation of the right-of-use asset.

Journal Entries on 1 January 2015

• Dr Right-of-use asset R879 308
• Cr Lease liability R879 308

Journal Entries on 31 December 2015

• Dr Interest expense R114 310
• Cr Lease liability R114 310
• Dr Lease liability R250 000
• Cr Cash/Bank R250 000
• Dr Depreciation expense R146 551 (Calculated as R879 308 / 6)
• Cr Accumulated depreciation R146 551

This incorporates the effective interest and the instalment paid of R250 000, reducing the lease liability. Additionally, the depreciation of the right-of-use asset is based on its expected useful life of 6 years. The ownership transfer at the end of the lease term is also considered.