Question 2

Question

Lease
SAXCO Ltd entered into a contract with Bakery SA Ltd on 1 March 2020 whereby Bakery SA Ltd will
lease a specialized oven to SAXCO Ltd. The contract meets the requirements of a lease in terms of
IFRS 16, leases.
The term of the lease are as follows:
Lease term 4 years
Initial payment R144 000
Instalment payable monthly in arrears R20 000
Useful life of oven 6 Years
The lessee’s incremental borrowing rate on 1 March 2020: 8% per annum
The lessee incurred R4 800 legal fees for negotiating the lease. It is impractical for the lessee to
calculate the costs incurred by the lessor and as a result cannot calculate the interest rate implicit in
the lease.
Required
(a) Calculate the right of use asset and the corresponding lease liability for SAXCO Ltd at initial
recognition.

Answer 1

To calculate the right of use asset and the corresponding lease liability for SAXCO Ltd at initial recognition, we need to consider the lease payments, lease term, incremental borrowing rate, and any initial direct costs.

First, let's calculate the lease liability:

Lease liability at initial recognition = Present value of lease payments

To calculate the present value of lease payments, we can use the following formula:

PV = PMT x (1 - (1 + r)^(-n)) / r

Where:
PV = Present value
PMT = Lease payments
r = Incremental borrowing rate
n = Lease term

PMT = R20,000 (monthly instalment payable in arrears)
r = 8% per year / 12 months = 0.67% per month
n = 4 years x 12 months = 48 months

PV = R20,000 x (1 - (1 + 0.67%)^(-48)) / 0.67%

PV = R20,000 x (1 - (1.0067)^(-48)) / 0.0067

PV ≈ R20,000 x (1 - 0.485347) / 0.0067

PV ≈ R20,000 x 0.514653 / 0.0067

PV ≈ R1,536,464.18

Therefore, the lease liability at initial recognition is approximately R1,536,464.18.

Next, let's calculate the right of use asset:

Right of use asset = Lease liability at initial recognition - Initial payment - Initial direct costs

Right of use asset = R1,536,464.18 - R144,000 - R4,800

Right of use asset ≈ R1,387,664.18

Therefore, the right of use asset at initial recognition is approximately R1,387,664.18.