Question

Grand Berhad sign a lease agreement with Branded Berhad on 1 January 2015 to lease a drying machine. The lease term is non- cancellable lease for 5 years with bargain purchase option and the title of the machine is to be passed to Branded Bhd at the end of the lease term. The fair value of the machine as at 1 January 2015 was RM90,000 with the initial direct cost of RM2,500 paid by Grand Bhd. The terms of lease agreement are as follows: RM Annual rental payments (paid at 31 December) 20,000 Estimated economic life 5 years Guaranteed residual value 5,000 Interest rate implicit 10% Assume financial year of Branded Berhad ends every 31 December. Required: i) Identify the type of lease in the case above and justify your answer based on the standard. ii) Prepare the related journal entries for the year ended 2017 in the books of Branded Berhad. iii) Explain the impact of treating the lease arrangement above as an operating lease.

Answer 1

1. This is financial lease, a finance lease is an arrangement whereby a finance company acquires an asset that the lessee needs, and lessor leases it to the lessee under a long-term leasing contract.

2. Lease rentals calculations:-

year	Amount	PV Factor @10%	Present Value
2015	20000	0.909	18180.00
2016	20000	0.826	16520.00
2017	20000	0.751	15020.00
2018	20000	0.683	13660.00
2019	20000	0.621	12420.00
2019	5000	0.621	3105.00

Dec 2017, journal entry

Particular	Debit	Credit
Lease Rentals A/c	15020
Cash Account		15020

3. If the above is treated as operating lease, then no ownership will be transferred at the end of lease term and shall not be treated as the asset of the company after 5 years.