GROUP ACCOUNTS

FINANCIAL REPORTING
Assignment Two Semester One, 2018

The chief executive officer of Kizomba plc, a well known construction company, seeks your services as a financial consultant. He has outlined two agreements the company entered into and would like to know the financial implications of each of them.

First Agreement:
Kizomba Plc accepted the leasing of a building as office space from Kwanza Estates Ltd from January 2018. The terms of the lease agreement included the following:

a) Kwanza Estates undertook to be providing insurance, repairs and maintenance of the asset.
b) Kizomba Plc would enjoy a one year rent free period as an incentive to accept the lease
c) Kizomba Plc would be required to pay an annual rental fee of K240m from 1 January 2019 in arrears.

Second Agreement

On 1 January 2018 Kizomba Plc obtained a piece of equipment on lease East Cape Finance Plc. The equipment was modified slightly for Kizomba Plc’s operational use. The equipment had a market value of K 1.6m.

The following were the terms of the lease:

a) The cost of the equipment included rentals.
b) Under the Lease agreement Kizomba Plc took responsibility for maintenance and insurance of the machine
c) The lease requires 5 annual payments of K40 000 payable in advance,
d) commencing on 1 January 2018.
e) At the end of the first five years, Kizomba would acquire the equipment on a papercorn lease agreement basis.

The rate of return implicit in the lease is 12%.

Required
(a) Identify the type of lease Kizomba entered into, giving reasons in line with the provisions of IFRS 16 Leases (5 marks)
(b) Explain the measurement and recognition of each lease in the books of the lessee according to IFRS 16 Lease (12 marks)

(c) Explain the measurement and recognition of each lease in the books of the lessor, applying IFRS 15 Revenue as appropriate. (13 marks)
(Total: 30 marks)