Leases

Tutorial Question 1
5 years to calculate
Evin Berhad enters into a leasing agreement with Alive Berhad on 1 January 2022 for an
equipment costing RM110,000. The lease agreement requires payment of five annual rents
of RM25,000 each, payable in arrears at the end of the respective years. After the end of the
primary lease period, the lessee has the right to purchase the asset at a bargain price of
RM20,000. At the date of the lease agreement, Evin Berhad is reasonably certain that it will
exercise the right to purchase the equipment at the end of the lease term. The lease is non-
cancelable. The title of the equipment is to be passed to Evin Berhad at the end of the lease
period. Evin Berhad believes that the equipment will last for eight years and will have no
residual value at the end of that period. It depreciates assets of this type on a straight-line
method. Evin Berhad engages the lessor to service the equipment, paying a servicing fee of
RM5,000 per year. The implicit interest rate is 10% per annum.

Required:

a) Determine whether the lease is a finance lease or an operating lease.

b) Determine the amount that shall be recorded on initial recognition of the equipment.
c) Calculate the total finance charge of the lease.
d) Prepare the journal entries for the year 2022.
e) Show the charges in the Statement of Profit or Loss from year 2022 until year 2026.

Tutorial Question 2

Wakaf Tembusu Medical Center (WTMC), a newly set-up hospital, leases an electronic digital
scanning machine from Tawakal Berhad. The machine has an estimated life of 12 years; the
lease is for a period of 10 years. The normal selling price is RM859,335, and its guaranteed
residual value at the end of the cancelable lease term is estimated to be RM37,500. WTMC
will pay rents of RM125,000 at the beginning of each year and all the maintenance and
insurance costs. Tawakal Berhad incurred a cost of RM525,000 in manufacturing the machine,
and RM35,000 in negotiating and closure of the lease. Tawakal Berhad has determined that
WTMC is a very reliable client. No other costs will be incurred, and implicit interest rate is 10%.

Required:

a) Discuss the nature of this lease in relation to Tawakal Berhad.

b) Compute the amount of each of the following items:
i) Lease receivable at inception of the lease
ii) The selling price
iii) Cost of sales
c) Prepare a 10-year lease amortization schedule.
d) Prepare all of Tawakal Berhad' s journal entries for the first year of the lease.