FAC3703 Assignment 1 (COMPLETE ANSWERS) Semester 2 2024 - DUE 7 September 2024

FAC3703 Assignment 1 (COMPLETE ANSWERS) Semester 2 2024 - DUE 7 September 2024 Ozone Ltd Ozone Ltd is neither a manufacturer nor a dealer that leases ozone friendly machinery that reduces the emission of harmful chemicals. Ozone has a 28/29 February year-end. As part of its business strategies, Ozone Ltd entered into the following transactions: Transaction 1 Ozone Ltd entered into an agreement with Woodworks Ltd in which Ozone Ltd leased machinery to Woodworks Ltd. The contract between the two companies contains a lease in terms of IFRS 16, Leases. Ozone Ltd purchased this machine on 1 March 2023 at a cost of R420 000. FAC3703/02/2024 The lease agreement for the machine is as follows: Fair value of the machine on 1 March 2023 R420 000 Lease commencement date 1 March 2023 Lease instalments payable bi-annually in arrears on 31 July and 28 February R90 000 Guaranteed residual value at the end of the lease term R15 000 Unguaranteed residual value at end of the lease term R5 000 Lease term 3 years Initial direct costs incurred by Ozone Ltd R10 000 Initial direct costs (Legal Fees) incurred by Woodworks Ltd R15 000 Woodworks Ltd will take ownership of the machinery at the end of the lease term upon payment of the guaranteed residual value. The machinery has a useful life of 5 years at the beginning of the lease term and a Rnil residual value. The profit before tax of Woodworks Ltd for the year ended 29 February 2024 amounted to R1 500 000 before the lease transaction was taken into account. Assume the deferred tax balance at 1 March 2023 was Rnil. For tax purposes, the legal fees incurred by Woodworks Ltd are not regarded as expenses as it was not incurred in the production of income and is capital in nature. Transaction 2 Ozone Ltd entered into a lease agreement on 1 March 2024 to lease a delivery vehicle from VehiclesRus Ltd. The lease contractual terms result in a non-cancellable term of 12 months, with no option to purchase, and an option to extend for a further six months. Given that the rentals in the six month period were significantly below market value, management was certain to exercise the option to extend the contract up until the full 18 months. Ozone Ltd makes use of the recognition exemption in terms of IFRS 16, Leases for all short-term and low-value assets. Transaction 3 Since the profitability of the company had been positive, Ozone Ltd made the following investment: On 1 March 2023, Ozone Ltd purchased a bond from Growth Bank Ltd at its fair value. The date of the maturity is 28 February 2027. The coupon interest is payable annually on 28 February. The principal amount is mandatorily redeemable on 28 February 2027 at face value. Ozone incurred Rnil transaction costs for the purchase of the bond. The investment in the bond from Growth Ltd are held within a business model, whose objective is to collect future contractual cash flows. FAC3703/02/2024 The following contractual details are applicable to the bond: Market rate 14% per annum Coupon rate 11% per annum Nominal value R 2 000 000 Future value R 2 000 000 Period 4 Years Transaction 4 On 1 March 2023, Ozone Ltd, issued 500 000, 20% convertible debentures at the face value of R15 each. The 20% convertible debentures interest is payable on 28 February of each year and the debentures are compulsory convertible into ordinary shares (1 ordinary share for every 5 debentures held) on 28 February 2026. When the debentures were issued, the prevailing market interest rate for similar debt without a conversion option was 25% per annum. The debentures are not held for trading. Assume a tax rate of 29%. FAC3703/02/2024 REQUIRED: Marks (a) Prepare journal entries to account for transaction 1 in the accounting records of Woodworks Ltd for the year ended 29 February 2024. Show dates for each journal. Ignore tax consequences. Journal narrations are not required. 15 (b) Refer to transaction 1, Calculate the deferred tax balance of Woodworks Ltd for the year ended 29 February 2024. 7 (c) Refer to transaction 2, In respect of the lease entered into by Ozone Ltd on 1 March 2024, discuss whether the lease meets the definition of a short-term lease and whether Ozone Ltd would qualify for the option to apply the recognition exemption. 7 (d) Discuss the classification and initial measurement of the bonds (transaction 3) in the accounting records of Ozone Ltd. No c