(c) On 1 January 20x1, Pali Bhd sells an item of machinery to Ann Bhd for its fair value of RM10 million. The asset had a carrying value of RM7.1 million prior to the sale. This sale represents the satisfaction of a performance obligation, in accordance with MFRS115 Revenue from Contracts with Customers. Pali Bhd enters into a contract with Ann Bhd for the right to use the asset for the next five years. Annual payments of RM500,000 are due at the end of each year. The interest rate implicit in the lease is 5%. The remaining useful life of the machine is much greater than the lease term.

Required: (i) Determine the present value of the annual lease payment.

(ii) Explain how Pali Bhd will account for the transaction on 1 January 20x1. (Note: Show the journal entry as part of your answer).