QUESTION 1 (25 MARKS)

Seri Wani Medical Centre (SWMC), a newly set-up hospital, leases an electronic digital scanning machine from BB Bhd. SWMC is implementing the right-of use in accordance to MFRS 16. The machine has an estimated life of 12 years; the lease is for a period of 10 years.

The normal selling price is RM860,000 and its guaranteed residual value at the end of the lease term (that allows cancellation) is estimated to be RM31,500. SWMC will pay rental of RM125,000 at the beginning of each year and all the maintenance and insurance costs. BB Bhd has determined that SWMC is a very reliable client. No other costs will be incurred and implicit interest rate is 10%.

The value of RM1 receivable at the end of each year at discount rate of 10% can be taken as 0.38554 in year 10. The 10% annuity discount factor for 10 years (PViF,10,10) is 6.75902.

a) Compute the lease receivable/liability at the commencement of the lease.

b) Determine the nature of this lease. Justify your answer.