On1March2022,Megatech Limited entered into a lease agreement with Ventura Limited. In terms of the agreement, Megatech Limited
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- On 1 March 2022, Megatech Limited entered into a lease agreement with Ventura Limited. In terms of the agreement, Megatech Limited will rent an industrial machine from Ventura Limited.The cash selling price of the machine is R500 000, and Megatech Limited will pay Ventura Limited 5 lease payments of R129 517 each, payable in arrears on 28 February. The machine will be returned to Ventura Limited at the end of the lease term. No initial direct costs were incurred by either of the parties.On 1 March 2022, the machine had a carrying amount of R500 000 in Ventura Limiteds records and the original cost of the machine was R750 000. Ventura Limited is not a manufacturer or a dealer, and you can assume that the lease agreement is a finance lease for Ventura Limited.In terms of the lease agreement, Megatech Limited has provided a residual value guarantee of R50 000 to Ventura Limited, therefore if Ventura Limited is unable to sell the machine for at least R50 000 at the end of the lease term, Megatech Limited will pay any shortfall to Ventura Limited.On 1 March 2022, Megatech Limited did not expect to make a payment under the residual value guarantee due to Ventura Limited reasonably expecting to sell the machine for R70 000 at the end of the lease term.Required: With reference to the Machine lease agreement and the requirements of IFRS 16, briefly discuss how Megatech Limited should treat the guaranteed residual value included as part of the lease agreement.
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
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