Comprehension Case

PART C: Leases (10) Mr. Kiran proposes to issue bonds and with the cash proceeds purchase the needed assets. SP is considering to lease assets from three potential lessors. The assets are to be used in property What might be the advantages of leasing the assets instead of owning them? What might development in next year. The Operation Manager provides the details as follows: be the disadvantages of leasing the assets instead of owning them? Potential lessor Harman Bhd. Armaq Bhd. Mandel Bhd. (11) Mr Fairul, who just graduated in accounting, is auditing the company's financial state- Type of asset Excavator Dump Truck Concrete Mixer ment for the year ended 31 December 2018. He noticed that on 1 December 2017, the Yearly rental RM15,000 (first RM6,000 (first RM5,500 (first company entered into a leasing contract as follows: payment on 31 payment on 28 payment on 30 June December 2018) February 2019) 2019 Inception date 1 January 2018 1 March 2018 1 July 2018 i. The non cancellable term of 2 years. Lease term 10 years 7 years 3 years ii. Rental of RM3,240 per year (paid on every 30 November). (The present value is Estimated economic 25 years 15 years 7 years life RM5,778.) Purchase option RM75,000 at end of None None iii. Estimated residual value after 2 years is RM1, 100. SP guarantees the residual value 10 years of RM1, 100. Renewal option Non None None Fair value at RM220,000 RM70.000 RM20,000 iv. Estimated economic life of the asset is 5 years. inception of lease v. The implicit rate and SP's incremental borrowing rate is 8% per year. Guaranteed residual -Q- RM15,000 RM10,000 value Estimated residual RM90,000 RM11,000 RM10,000 value at end of lease In the company's accounting record, the company recorded the lease payment as rental term expense. Mr Fairul asked Miss Farisha, an account clerk, why the company recorded as Implicit rate 5% 4% 4% rental expense. Miss Farisha explained that, the lease contract does not meet the require- ments to be classified as a finance lease as none of the test is met. Mr Fairul suspected that Miss Farisha referred to the old accounting standard. CASE INSTRUCTIONS: Discuss the above situation. In your discussion be sure to include (a) what you determined (8) Assuming that SP agreed to lease all the assets, prepare journal entries at the inception about the lease, and (b) how you advised the company to account for this lease. Explain date. every journal entry that you believe necessary to record this lease properly including the correction for the error made. (9) For each of the assets, provide an analysis to determine the type of lease for lessor using the following schedule. Criteria Analysis Transfer of title? Yes/No Contain purchase option? Economic life test PV of MLP equals at least substantially all of FV of the leased asset? Type of lease End of document