Question Two

$($a$)$ Fast Jet Ltd has a reporting date of $31$ December in each calendar year. It prepares its financial statements in accordance with financial reporting standards. A new Accountant have recently joined Fast Jet finance department and has raised a number of queries:

While searching for some invoices The Accountant found a contract which Fast Jet Ltd$.$ have entered into in $1^{st}$ January, $2019$ with ATC Ltd$.$ The contract allows Fast Jet to use a specific aircraft owned by ATC Ltd$.$ for a period of $3$ years. Fast Jet is required to make annual payments.

On $1^{st}$ January, $2019$ costs were incurred negotiating the contract. The first annual payment was made on ${31}^{st}$ December, $2019$ and both of these amounts have been expensed to the statement of profit or loss.

There are contractual restrictions concerning where the aircraft can fly. Subject to these restrictions Fast Jet determines where and when the aircraft will fly and the cargo and the passengers that will be transported.

CS ${?}_{\text{C}\text{a}\text{m}\text{S}\text{c}\text{a}\text{n}\text{n}\text{e}\text{r}}$

ATC Ltd$.$ is permitted to substitute the aircraft at any time during the three year period for an alternative model and must replace the aircraft if it is not working. Any substituted aircraft must meet strict interior and exterior specifications outlined in the contract. There are significant costs involved in outfitting an aircraft to meet Fast Jet specifications

The accountant require advice as to the correct treatment of this contract.

Required:

Advice the accountant in matters set out above with reference to International Financial Reporting standards

$($b$)$ On $1^{st}$ January, $2019$ Diamond Ltd$.$ entered into a two year lease for a machinery. The contract contains option to extend the lease term for a further year. Diamond Ltd$.$ believes that it is reasonably certain to exercise this option. Machineries have a useful life of $10$ years. $.$

Lease payments are TZS$.100,000,000$ per annum for the initial term and TZS$.150,000,000$ per annum for the optional period: All payments are due at the end of the year. To obtain the lease, Diamond Ltd$.$ incurred initial direct costs of TZS$.30,000,000.$ The lessor have agreed to refund TZS$.10,000,000$ outright.

The interest rate of the lease is not readily determinable, however Diamond's incremental rate of borrowing is $5\%.$

Required:

i$.$ Calculate the initial carrying amount of the leas$$ li$\backslash$bar $($a$)$ bility $$nat the Right of Use asset and provide the double entries needed to record these amounts in Diamonds financial records.

ii$.$ Prepare extracts for the statements of profit or loss and other comprehensive income for the years ended $311^{st}$ December, $2019$; $311^{st}$ December, $2020$ and ${31}^{st}$ December, $2021.$