On 1 January 2018 ANNA Bhd entered into a lease agreement to lease a machine from ZUZA Bhd. The terms of the agreement included:

non-cancellable lease term of five years, with no option to buy the machine at the end of lease term;

lease rental of RM40,000 per year to be paid at end of year, commence on 31 December 2018; and

the lease rental was calculated and mutually agreed upon based on 10% rate of return to ZUZA Bhd.

The machine is expected to have an estimated useful life of five years. Both companies use the straight-line method of depreciation. The fair value of the machine at the inception date is RM155,000. PVOA(n=5, i=10%) = 3.7908

REQUIRED:

(Round your answer to two decimal points.)

(a) Determine the present value of lease payments and prepare journal entries at 1 January 2018 for ANNA Bhd.

(b) Prepare amortization schedule until end of lease term and prepare journal entries for ANNA Bhd to record leasing activities during the first and second year of the lease.

(c) Discuss the nature (type of lease) of this lease to ZUZA Bhd.

(d) Prepare journal entries at 1 January 2018 for ZUZA Bhd.

(e) Prepare journal entries for ZUZA Bhd to record leasing activities during the first and second year of the lease.

QUESTION 2

On 1 January 2018, KOMSIS Bhd, signs a non-cancellable lease agreement to lease a computer system for four (4) years to BAYU Bhd. Annual lease payments of RM35,000 are to be made at the end of each lease year starting 31 December 2018. The implicit rate which is known by both parties is 10% and the incremental borrowing rate for BAYU Bhd is 9%.The cost and the fair value of the asset at the inception date is RM200,000. The straight-line method is used to depreciate the asset and the useful life of the assets is 8 years.BAYU Bhd guarantees a residual value of RM12,000 at the end of the lease term, which equals the expected residual value of the asset.

REQUIRED:

(Round your answer to two decimal points)

(a) Determine the type of lease to KOMSIS Bhd. Justify your answer as per MFRS 16 Leases.

(b) Determine the present value of lease payments for BAYU Bhd and prepare the related journal entries on 1 January 2018.

(c) Prepare the journal entries for BAYU Bhd to record leasing activities during the first year of the lease term (including the amortization schedule for the first two years of the lease term).

(d) Prepare journal entries for KOMSIS Bhd to record leasing activities during the first year of the lease.

(e) Describe the effect on the lessee of a "purchase option" on accounting for a finance lease transaction.

QUESTION 3

On 1 January 2018, VIVI Bhd (VIVI), a company which operates a retail business, signed a contract to lease a shop lot at Quill City Mall from Wealthy Properties Bhd (WP). The lease term is for five (5) years, non-cancellable, non-renewable, and contains rights to use and maintain the shop lot at lessee's own discretion during the lease term. The fair value of the shop lot on 1 January 2018 is RM650,000 and it has an estimated economic useful life of 40 years.

According to the lease agreement, VIVI is required to pay a lease payment of RM60,000 annually starting from 31 December 2018. Given that VIVI's incremental borrowing rate is 12%, meanwhile WP's implicit rate is 10%, which is known by both parties. Additionally, the lease agreement contains an option for VIVI to purchase the shop lot at the end of the lease term at a value of RM450,000. It is expected that VIVI will take this option at the end of the lease term. However, VIVI does not provide any guarantees to the residual value of the shop lot.

Both VIVI and WP use MFRS 16 Leases in accounting for leasing activities. Both companies depreciate their assets using a straight line method.

REQUIRED:

(Round all numbers to the nearest RM).

(a) Determine whether the contract contains a lease or not in accordance to Paragraph 9 of MFRS 16 Leases.

(b) Determine the present value of lease payments for VIVI Bhd on 1 January 2018. Prepare a lease amortization table for the year 2018 until year 2019.

(c) Prepare the journal entries for VIVI Bhd to record the leasing activities during the year 2018.

(d) Prepare the journal entries for Wealthy Properties Bhd to record the leasing activities during the year 2018.