Tekyiman Ltd (Tekyiman) sold one of its warehouses on 1 July 2019 to a finance house and leased it back under an operating lease on the same date. The carrying amount of the warehouse on 1 July 2019 was GH¢16 million. The terms of the sale and leaseback were as follows; sale proceeds of GH¢23.5 million and half-yearly lease rental payments of GH¢1 million paid in arrears on 31 December and 30 June over a period of 4 years.
The open market value of the property would have been GH¢20 million if not leased back on these terms. The lease rental payments were approximately double market rates for such a lease. The finance house can terminate the lease at any time with a month’s notice to Tekyiman, at which point any excess of the sales proceeds over market value of the property not yet repaid becomes repayable immediately.
Tekyiman depreciated the property up to 1 July 2019 and then derecognised it, recognising a profit of GH¢7.5 million (netted against expenses in the statement of profit or loss). The first GH¢1 million, 6 monthly lease rental payment, made on 31 December 2019 has been charged to cost of sales. No other accounting entries have been made.
Tekyiman now wishes to amortise the excess of the sales proceeds over market value on a straight line basis over the period the warehouse will be used (4 years).
Required:
Advise the directors of the entity of the correct accounting treatment of the above transaction under IFRS 16: Leases (as the information permits) for the year ended 31 December 2019. (6 marks)
View Solution
Sale and leaseback
Double entries performed by Tekyiman:
GH¢’000 GH¢’000
DR Cash 23,500
CR Property 16,000
CR (P/L) 7,500
DR Cost of sales (P/L) 1,000
CR Cash 1,000
Correcting double entries required for excess of sale proceeds over fair value:
GH¢’000
DR (P/L) (23,500 – 16,000) 7,500
CR Other income (P/L) (20,000 – 16,000) 4,000 genuine profit – moved
CR Deferred income (SOFP) (23,500 – 20,000) 3,500 excess profit – deferred
The deferred income should be amortised to profit or loss (other income) over the period the asset is expected to be used:
GH¢’000
DR Deferred income (3,500/4 years x 6/12) 438
CR Other income (P/L) 438
Reversal of profit on sale : 1 mark
Recognition of fair value through profit or loss : 1 mark
Deferred income (excess profit) : 2 marks
Journal entries for deferred income : 2 marks