Financial Accounting and Reporting 2 - Lease

Safe Bhd has two options. It can buy an asset for cash at a cost of RM22,840 or it can lease it by way of a finance lease. The terms of the lease are as follows:

1) Primary period is for four years from 1 July 2014 with a rental of RM8,000 per annum payable on 30 June each year.

2) The lessee has the right to continue to lease the asset after the end of the primary period for an indefinite period, subject only to a nominal rent.

3) The lessee is required to pay all repair, maintenance and insurance costs as they arise.

4) The interest rate implicit in the lease is 15%.

The lessee estimated the useful life of the asset to be ten years. Depreciation is provided on a straight-line basis.

Required

a) Explain briefly how the above lease should be classified in accordance with MRS 117 Leases.

b) Calculate the amounts to be shown in the Statement of Profit or Loss for the year ended 30 June 2015 and Statement of Financial Position as at that date, assuming the finance lease option is taken.