Question
Daffodil Sdn. Bhd. acquired the use of a plant over three years by way of a lease. Installments of RM700,000 are paid six-monthly in arrears
Daffodil Sdn. Bhd. acquired the use of a plant over three years by way of a lease. Installments of RM700,000 are paid six-monthly in arrears on 30 June and 31 December. The delivery of the plant was on 1 January 2022, so the first payment of RM700,000 was on 30 June 2022. The present value of the minimum lease payment is RM3,000,000. The interest implicit in the above is 10% per six months. The plant would normally be expected to last for three years. Daffodil Sdn. Bhd. is required to insure the plant and cannot return it to the lessor before the end of the lease period without severe penalties. Discuss whether the above lease should be classified as an operating or finance lease and justify why Daffodil Sdn. Bhd. could deliberately choose to report the lease as an operating lease.
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