QUESTION 5 (20 MARKS: 36 MINUTES)

Gold Bhd is a multinational company that operates in Bayan Lepas, Penang. The companys financial year end is on 31 December and has the policy to depreciate all property, plant and equipment (PPE) on a straight-line method. Presented below are the lease agreements of Gold Bhd:

Lease Agreement 1: Diamond Bhd

Gold Bhd purchased a building at the cost of RM5 million at the end of 2018. On 1 January 2019, Gold Bhd entered into a non-cancellable lease agreement with Diamond Bhd to lease the building for a lease term of six (6) years. The agreement requires Diamond Bhd to pay a rental of RM480,000 annually at the end of each financial year.

At the end of the lease term, Diamond Bhd has an option to purchase the building at RM4 million and it is reasonably certain that Diamond Bhd will exercise the purchase option. The current market price of the building is equivalent to its initial cost. The implicit interest rate and borrowing rate of the building are 4% and 5% per annum, respectively. The building is expected to have a useful life of 50 years. Diamond Bhd uses the straight-line method to depreciate the building and closes its accounts on 31 December.

Lease Agreement 2: Topaz Bhd

On 1 January 2020, Gold Bhd entered into a lease agreement with Topaz Bhd. Under the terms of the agreement, Topaz Bhd provides Gold Bhd with a machine for a lease term of five (5) years in exchange for an annual lease payment of RM54,000, payable at the financial-year end of both companies, 31 December. The market value and cost of the machine on the commencement date of the lease is RM275,000. While the interest rate implicit in the lease is 6%, the borrowing rate for the lease is 7%, known by both parties. At the end of the lease term, the machine is expected to be returned to Topaz Bhd. The new account clerk of Gold Bhd has recorded the first lease payment as Dr. Rental Expense RM54,000 and Cr. Bank RM54,000. No other accounting entries have been made in relation to the lease by Gold Bhd. The useful life of the machine is estimated to be eight (8) years.

REQUIRED: (Round your answer to the nearest RM)

(a) Prepare all the journal entries for Gold Bhd for the financial years 2019 and 2020. Show all workings. (15 Marks)

(b) Assume that Topaz Bhd depreciates the machine based on the straight-line method, discuss the accounting treatments for the leasing transaction for Topaz Bhd for the financial year 2020. Support your answer with necessary workings and journal entries, where appropriate. (5 Marks)