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1. On 1 March 2020, Muluwe entered into a lease agreement to rent an item of plant from Liseli Ltd, a company specialized in leasing non current assets to business houses in Kitwe. The terms of the agreement were that Muluwe would pay 3 rentals of K38,000 per annum in advance commencing on 1 March 2020 with an option to extend the lease term for a further 2 years for rentals of K45,000 per annum in advance in the optional period. Muluwe is uncertain it would continue, to use the plant in the optional period. The plant has a useful economic life of 10 years.

To obtain the lease, Muluwe incurs initial direct costs of K15,000 arising from legal fees related to the transaction. The lessee received lease incentives amounting to K4,000 from the lessor. The lease does not provide for the transfer of title of leased asset to the lessee at the end of the lease term.

Muluwes cost of borrowing is 8%.

Required:

Explain the required accounting treatment of the above transaction in the books of Muluwe Ltd for the years ended 31 March 2021 and 31 March 2022.

Note: Your answer must include financial statement extracts for the two years.

(10 marks)

[Total: 20 marks]

1. On 1 March 2020, Muluwe entered into a lease agreement to rent an item of plant from Liseli Ltd, a company specialized in leasing non current assets to business houses in Kitwe. The terms of the agreement were that Muluwe would pay 3 rentals of K38,000 per annum in advance commencing on 1 March 2020 with an option to extend the lease term for a further 2 years for rentals of K45,000 per annum in advance in the optional period. Muluwe is uncertain it would continue, to use the plant in the optional period. The plant has a useful economic life of 10 years.

To obtain the lease, Muluwe incurs initial direct costs of K15,000 arising from legal fees related to the transaction. The lessee received lease incentives amounting to K4,000 from the lessor. The lease does not provide for the transfer of title of leased asset to the lessee at the end of the lease term.

Muluwes cost of borrowing is 8%.

Required:

Explain the required accounting treatment of the above transaction in the books of Muluwe Ltd for the years ended 31 March 2021 and 31 March 2022.

Note: Your answer must include financial statement extracts for the two years.

(10 marks)

[Total: 20 marks]

1. On 1 March 2020, Muluwe entered into a lease agreement to rent an item of plant from Liseli Ltd, a company specialized in leasing non current assets to business houses in Kitwe. The terms of the agreement were that Muluwe would pay 3 rentals of K38,000 per annum in advance commencing on 1 March 2020 with an option to extend the lease term for a further 2 years for rentals of K45,000 per annum in advance in the optional period. Muluwe is uncertain it would continue, to use the plant in the optional period. The plant has a useful economic life of 10 years.

To obtain the lease, Muluwe incurs initial direct costs of K15,000 arising from legal fees related to the transaction. The lessee received lease incentives amounting to K4,000 from the lessor. The lease does not provide for the transfer of title of leased asset to the lessee at the end of the lease term.

Muluwes cost of borrowing is 8%.

Required:

Explain the required accounting treatment of the above transaction in the books of Muluwe Ltd for the years ended 31 March 2021 and 31 March 2022.

Note: Your answer must include financial statement extracts for the two years.

(10 marks)

[Total: 20 marks]

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