Shacks Ltd is listed on the Namibia Stock Exchange and its reporting date is 31 December. Tilapy
Question:
Shacks Ltd is listed on the Namibia Stock Exchange and its reporting date is 31 December. Tilapy Ltd required the use of a 4 x 4 vehicle and entered into a finance lease contract with Shacks Ltd on 1 January 2017. Shacks Ltd neither manufactures nor deals in these types of vehicles. This vehicle was purchased by Shacks Ltd on 31 December 2016 for its fair value of N$710 000. The following information has been extracted from the finance lease contract:
• The lease term is four years;
• The lease payment is N$227 633 and is payable annually in arrears on 31 December;
• On expiry of the lease term, Shacks Ltd expects that it will be able to sell the vehicle for around N$45 000 but there is no guarantee that this amount will in fact be realised since it will be based on the overall condition of the vehicle. The N$45 000 is based on past history for similar types of transactions for similar vehicles and this amount remained unchanged throughout the lease contract term;
• Ownership of the vehicle will not transfer to Tilapy Ltd on expiry of the lease term;
• Shacks Limited paid an external legal advisor an amount of N$10 000 to prepare the finance lease contract.
• The terms of the lease contract will result in a market-related implicit interest rate.
The vehicle will be used by Tilapy Ltd for a qualifying purpose and the lease contract is a lease agreement for income tax purposes. Assume a wear and tear allowance of 25% per year (not pro-rated for a portion of the year) is granted on the cost of the vehicle for income tax purposes. The tax rate has remained unchanged at 28%. Ignore Value Added Tax (VAT). Assume a profit before tax of N$850 000 per year for each of the four years of the finance lease term, before the effect of the finance lease contract has been taken into account. There has always been certainty about the adequacy of future taxable income. There are no non-deductible expenses, non-taxable income or temporary differences other than those that are evident from the information provided for all financial years from 2017 to 2020. The initial direct costs of N$10 000 are deductible for tax in the year in which they are incurred. Assume that Shacks Ltd was in fact able to realize the N$45 000 unguaranteed residual value at the end of the lease term.
REQUIRED:
a) Prepare the journal entries (cash transactions included) that Shacks Ltd must process to account for the finance lease contract for the year ended 31 December 2017 in accordance with IFRS.
