TUTORIAL 14.2
On 1 January 01 St James Ltd entered into a sale and leaseback agreement in respect of all their plant. The plant has an open market value of R1 200 000, a tax value of R800 000 and a net book value of R1 100 000 at 1 January 01. The original cost of the plant was R1 500 000. The plant was sold for R1 400 000 and the terms of the leaseback were as follows:
； Number of yearly instalments paid in arrears
on 31 December 4
； Lease payment R630 000
； Effective interest rate 28.491%
； On expiry of the lease the plant will become property of St James Ltd again.
Additional information:
1. Assume a tax rate of 30%.
2. The receiver of Revenue allows a wear and tear allowance on plant and machinery of
20% per annum straight line after an initial allowance of 50%.
On sale of assets, a tax recoupment arises, which is calculated as the difference
between the sale proceeds (limited to original costs) and the tax value at the date of
sale.
3. St James Ltd provides depreciation on plant and machinery at 20% per annum on a
straight line basis.
REQUIRED:
1. Show the journal entries required to account for this transaction in the books of
St James Ltd for the .01 financial year.
2. Assuming that this transaction was an operating lease, show the journal entries
required.
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TUTORIAL 14.2
SUGGESTED SOLUTION
1. Finance lease
This is a finance lease and the excess of the sales proceeds over the carrying
amount (1 400 000-1 100 000) should not be immediately recognised as income in
the financial statements of St James Ltd. The profit of R300 000 should be deferred
and amortised over the lease term of 4 years (i.e. R75 000 p.a.)
Dr. Bank 1 400 000
Cr. Long-term liability 1 400 000
Finance received recognised as a liability
Dr. Plant 300 000
Cr. Deferred profit 300 000
Asset restated to sale price
Dr. Deferred profit 75 000
Cr. Finance charges 75 000
Defered profit amortised over lease term
Dr. Long-term liability 231 127
Finance charges 398 873
Cr. Bank 630 000
Lease payment split between interest and capital
Dr. Depreciation 381 818
Cr. Accumulated depreciation 381 818
Depreciation for the year
Dr. Long-term liability 296 977
Cr. Short-term liability 269 977
Dr. Deferred tax (B/S) 202 707
Cr. Deferred tax (I/S) 202 707
Deferred tax for 1998
Comment
The plant may have to be written down but this would have to be done in the context
of AC128 : Impairment of Assets to the higher of net selling price and value in use.
In this question we do not have the value in use and may well be higher than R1 400
000 and therefore no need to write down.
Amortisation table: Balance Interest Capital
.01 1 400 000 398 873 231 127
.02 1 168 873 333 023 296 977
.03 871 896 248 411 381 589
.04 490 307 139 693 490 307
Comments: the figures for 01and 02 do not have to be calculated and are included
only for completeness.
Depreciation:
Over 60 months i.e. R25 000 per month
; (400 000/25 000 = 16 months passed)
(60-16 = 44 months remaining)
Asset restated to R1 400 000/44 = R31 818 p.m.
; R31 818 x 12 = R381 818 p.a.
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Tutorial 14.2
Suggested Solution Cont’d
Deferred Tax: CV TB Temp. DT
diff. (B/S)
1/1/01 Plant 1 100 000 800 000 300 000 90 000 Cr
31/12/01 Plant 1 018 182 - 1 018 182
Def. profit (225 000) - (225 000)
Liability (1 168 873) - (1 168 873)
(375 691) 112 707 Dr
; movement 202 707
(Dr to B/S)
Tax calculation: R
Recoupment (1400-800) 600 000
Lease expense (630 000)
(30 000)
x 30%
= (9 000)
2. Operating Lease
Sales price (R1 500 000) above fair value (R1 200 000) and carrying amount
(R1 100 000) less than fair value (R1 200 000) thus profit above fair value (R200 000)
should be deferred and amortised over the period for which the asset is expected to
be used (4 years).
Dr. Bank 1 400 000
Cr. Plant 1 100 000
Profit on sale 100 000
Deferred profit 200 000
Sale of asset
Dr. Lease expense 630 000
Cr. Bank 630 000
Lease expense for year
Dr. Deferred profit 50 000
Cr. Lease expense 50 000
Deferred profit amortised
Dr. Deferred tax (B/S) 135 000
Cr. Deferred tax (I/S) 135 000
Deferred tax: CV TB Temp. DT
diff. (B/S)
1/1/01 Plant 1 100 000 800 000 300 000 90 000 Cr
31/12/01 Def. profit (150 000) - (150 000) (45 000) Dr
; movement 135 000
(Dr to B/S)
Tax calculation:
Same as for Part 1
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