On 2 January 2016, Alibaba Bhd signed a five year lease up to 31 December 2020 to use an electronic plant to be installed in its factory with an annual payment of RM 50000. Alibaba paid the initial annual payment on 2 January 2016 to the lessor, CP & Co., which agreed to deliver and install the plant by 10 January 2016. Five remaining annual lease payments would be made at the end of each year beginning from 31 December 2016.

Alibaba also committed a guarantee to CP & Co. that the leased plant should have a value not less than RM 60000, at the end of the lease. The interest rate implicit in the lease of Alibaba Bhd is 8 %.

Alibaba Bhd estimated that the fair value of the leased plant was around RM 300000. CP & Co. finally delivered and installed the plant as scheduled by 10 January 2016. Alibaba Bhd estimated that the useful life of the leased plant was around 6 years.

1. Discuss the accounting implication whether the transaction can be classified as finance lease or operating lease in accordance with MFRS 16 Leases.
2. Prepare the journal entries of Alibaba Bhd at initial recognition. ( assume the effect between 2 January 2016 and 10 January 2016 as being insignificant.