In December 2018, JCOV Bhd increased the operating capacity of its business. Due to a lack of liquid funds JCOV Bhd was unable to buy the required machine which had a cost of RM370,000. On the recommendation of the finance director, on 1 January 2019, JCOV Bhd entered into an agreement to lease the machine from PERISAI Bhd. The following information relates to this agreement:

1. The term of the non-cancelable lease is 3 years with no renewal option.

2. The fair value of the machine on 1 January 2019 is equal to its cost. The machine has an

estimated useful life of 4 years.

3. The agreement requires equal annual rental payments of RM116,000 to PERISAI Bhd,

beginning on 31 December 2019.

4. JCOV Bhd has guaranteed a residual value of RM38,500 to PERISAI Bhd.

5. JCOV Bhd's incremental borrowing rate is 5%. PERISAI Bhd's implicit rate is 4% and is

known to JCOV Bhd.

The machine has an estimated residual value of RM33,500 at the end of the lease term. Its

residual value after 4 years is expected to be only RM12,100. The machine will revert to

PERISAI Bhd at the end of the lease term. Both companies depreciates similar assets on a

straight-line basis.

REQUIRED:

(Round your answer to two decimal points)

(a) Assume that the fair value of the machine at the end of lease term is RM40,000. Prepare journal entry for JCOV Bhd to record the return of the machine to PERISAI Bhd.

(b) Assuming that the above lease does not transfer substantially all the risks and rewards

incidental to ownership of the leased asset, explain the accounting treatment for lease in

the book of both companies.