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FAC3703 Assignment 1 Semester 2 2024 - DUE 7 September 2024
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FAC3703 Assignment 1 Semester 2 2024 - DUE 7 September 2024 QUESTIONS WITH ANSWERS
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[Company name]FAC3703 Assignment
1 Semester 2 2024 -
DUE 7 September
2024
QUESTIONS WITH DETAILED ANSWERS
, FAC3703 Assignment 1 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
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