5. Reassessment of lease liability

Lessee Y enters into a lease for 5 years with Lessor L, for a retail building, commencing on 1 January. Y pays RM1.55 m in arrears and its incremental borrowing cost is 5.9%. The lease contract states that lease payments for each year will increase on the basis of the increase in the CPI for the preceding year.

At the commencement date, the CPI for the previous year is 120 and the lease liability is RM6.55 m based on annual payments of RM1.55 m. Assume that initial direct costs are zero and there are no lease incentives, prepayments or restoration costs.

At the end of year 1, the CPI increases to 125.

Required: Show the journal entries for the year 1