You have been contracted by Piyefu Limited as a consultant in accounting services and you have been provided with the following: 1. Piyefu Limited required funds to finance a new ambitious rebranding exercise. It’s only possible way of raising finance is through the sale and leaseback of its head office building for a period of 10 years. The lease payments of K1 million are to be made at the end of the lease period. The current fair value of the building is K10 million and the carrying value is K8.4 million. The interest rate implicit in the lease is 5%. 2. Piyefu Limited prepares its financial statements to 30th September each year. On 1st October 2021, Piyefu began to lease a property on a ten (10) year lease. The annual payments were K2.5 million payable in advance, the first payment being made on 1st October 2021. In arranging this lease, Piyefu Ltd incurred initial direct costs amounting to K0.5 million and received lease incentives of K0.25 million. The annual rate of interest implicit in the lease is 10%. Required: a) In respect of the transaction in (1.) above, advise Piyefu Limited on how to account for the sale and leaseback in its financial statements if the office building were to be sold at the fair value of K10 million and:
You have been contracted by Piyefu Limited as a consultant in accounting services and you
have been provided with the following:
1. Piyefu Limited required funds to finance a new ambitious rebranding exercise. It’s
only possible way of raising finance is through the sale and leaseback of its head
office building for a period of 10 years. The lease payments of K1 million are to be
made at the end of the lease period. The current fair value of the building is K10
million and the carrying value is K8.4 million. The interest rate implicit in the lease is
5%.
2. Piyefu Limited prepares its financial statements to 30th September each year. On 1st
October 2021, Piyefu began to lease a property on a ten (10) year lease. The annual
payments were K2.5 million payable in advance, the first payment being made on 1st
October 2021. In arranging this lease, Piyefu Ltd incurred initial direct costs
amounting to K0.5 million and received lease incentives of K0.25 million. The annual
rate of interest implicit in the lease is 10%.
Required:
a) In respect of the transaction in (1.) above, advise Piyefu Limited on how to account
for the sale and leaseback in its financial statements if the office building were to be
sold at the fair value of K10 million and:
i) Performance obligations are not satisfied; or,
ii) Performance obligations are satisfied.
b) Explain how the lease in (2.) above will be accounted for in the financial statements of
Piyefu Limited for the years ended 30th September 2021 and 2022.
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