Bronx Ltd

In January 2023, Bronx Ltd relocated its manufacturing division. The lease on Bronx Ltd's old factory building expired on 31 December 2022 and it had to find new premises from 1 January 2023, as there was no possibility to renew the existing lease.

The company signed a lease contract for a new factory building with Greeff Ltd for 10 years, starting on 1 January 2023. Some modifications were allowed to be made to the factory building in order to install Bronx Ltd’s machinery on condition that Bronx Ltd restores the factory building to its original condition at the end of the lease term.

The following information is available:

• The commencement date of the lease is 1 January 2023.
• A deposit of R3 297 840 was paid on 30 November 2022 to secure the lease.
• Legal fees of R48 480 were incurred to obtain the lease. R36 000 of this amount is allocated costs of the company’s legal and risk management department. The balance was paid to an external law firm, 65% of which was reimbursed by Greeff Ltd.
• R89 600 was spent on modifying the factory building to suit Bronx Ltd’s needs.
• Greeff Ltd agreed to reimburse Bronx Ltd for all relocation costs. Relocation costs of R453 120 were incurred.
• The estimated cost of restoring the building to its original condition at the end of the lease term is R1 929 600. An appropriate pre-tax discount rate is 10% per annum.
• The annual lease payments are R6 750 000, payable in arears, and Bronx Ltd has guaranteed a residual value of R22 500 000.
• The interest rate implicit in the lease could not be determined. Bronx Ltd’s incremental borrowing rate is 12%.

 Source: Adapted from Daniels, J.C. 2023.