Capital Co entered into a sale and leaseback on 1 April 2017. It sold an asset with

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Question:

Capital Co entered into a sale and leaseback on 1 April 2017. It sold an asset with a carrying amount of GH¢300,00 for GH¢400,00 (equivalent to fair value) and leased it back over a five-year period, equivalent to its remaining useful life. The transaction constitutes a sale in accordance with IFRS 15.

The lease provided for five annual payments in arrears of GH¢90,000. The rate of interest implicit in the lease is 5%.

Required:

Pass a journal to record above transaction on 1 April 2017.

Prepare extracts from the statement of profit or loss and statement of financial position at 31 March 2018.

On 1 January 2018, AKPAFU Ltd sells an item of machinery to WOE Ltd for its fair value of GH¢3 million. The asset had a carrying amount of GH¢1.2 million prior to the sale. This sale represents the satisfaction of a performance obligation, in accordance with IFRS 15 Revenue from Contracts with Customers.

AKPAFU enters into a contract with WOE for the right to use the asset for the next five years. Annual payments of GH¢500,000 are due at the end of each year. The interest rate implicit in the lease is 10%.

The present value of the annual lease payments is GH¢1.9 million. The remaining useful economic life of the machine is much greater than the lease term.

Required: Explain and illustrate how the transaction will be accounted for on 1 January 2018 by both AKPAFU and WOE.