topic :, lease

PAS2313/32134/TEST2 QUESTION 1 (25 MARKS) KHY Manuscript Sdn Bhd is a Malaysian company best known for its book retailing and online retailing services as well as being involved in the printing, publishing and distribution of books and library services, located near Universiti Selangor, Shah Alam. The book store offers a multitude of services, both online and in-store as well as providing photocopy services for the convenience of the students and the greater community. On 1 January 2020, MGK Bhd entered into a lease agreement with KHY Manuscript Sdn Bhd to provide the book store with 5 units of photocopy machines at a rental of RM3,600 each per annum at the end of each financial year for 5 years. On the same day, KHY Manuscript Sdn Bhd paid an installation cost amounted to RM10,000. The lease agreement specifies that KHY Manuscript Sdn Bhd has full control over the use of the photocopy machines throughout the arrangement period. In addition, the contract also mentioned that the maintenance service of the photocopy machines will be borne by KHY Manuscript Sdn Bhd throughout the contract period. The photocopy machines have an estimated useful life of 10 years. The interest rate implicit in the lease was calculated and mutually agreed upon 5% rate of return to MGK Bhd. After the 5-year contract term period, KHY Manuscript Sdn Bhd has to return the photocopy machines to MGK Bhd. Subsequently, the agreement specifies that MGK Bhd has the right to substitute with a similar photocopy machine to KHY Manuscript Sdn Bhd if the leased-out photocopy machines break down. This is to fulfil MGK Bhd's obligation on the lease arrangement with KHY Manuscript Sdn Bhd. Any replacement, if necessary, is made free of charge. The financial year of both MGK Bhd and KHY Manuscript Sdn Bhd end on 31 December each year. Required: Advise whether the above contract between KHY Manuscript Sdn Bhd and MGK Bhd contains a lease under MFRS 16 Leases. (5 marks) a. b. Determine the amount that shall be recorded on the initial recognition of the photocopy machines. (3 marks) C. Prepare the lease amortization schedule for KHY Manuscript Sdn Bhd to show the allocation of the finance charge. (5 marks) d. Provide journal entries to record the above transactions for the first two years in the books of KHY Manuscript Sdn Bhd. (6 marks) e. Prepare the extract of the financial statement for the year ended 31 December 2021 in the books of KHY Manuscript Sdn Bhd. (6 marks)