Reference no: EM132954503

You are a trainee accountant for The Finance Team, a company that provides businesses with accounting staff on an interim basis. You have been contracted out to Mzansi Risk. Mzansi Risk provides short term insurance services to individuals and companies. These insurance services include car and household insurance.

On 1 February 2016 Mzansi Risk entered into a lease agreement with Hollard whereby Mzansi Risk will have the unrestricted right of use of an office building. Ownership will pass to Mzansi Risk at the end of the lease term at no further consideration to Hollard.

Details of the transaction are as follows:

Fair value of office building on 1 February 2016 (incl VAT) R1 800 000
Date of lease (inception & commencement date) 1 February 2016
Lease term 18 years
Lease instalment (payable monthly in arrears) R19 171
Useful life of office building 20 years straight line
Rate implicit in the lease 11%

• The lease transaction has not yet been recorded in the accounting records of Mzansi Risk for the year ended 29 February 2016. The building qualifies for VAT purposes and VAT may be claimed at inception of the lease in terms of the relevant legislation.
• The South African Revenue Services (SARS) grants a twenty five year allowance on office building and SARS does NOT apportion this allowance.

REQUIRED:

Problem 1: Calculate the Finance expense for the year ended 29 Feb 2016