Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / In December 2018, JCOV Bhd increased the operating capacity of its business
In December 2018, JCOV Bhd increased the operating capacity of its business. Due to a lack of liquid funds JCOV Bhd was unable to buy the required machine which had a cost of RM370,000. On the recommendation of the finance director, on 1 January 2019, JCOV Bhd entered into an agreement to lease the machine from PERISAI Bhd. The following information relates to this agreement:
1. The term of the non-cancelable lease is 3 years with no renewal option.
2. The fair value of the machine on 1 January 2019 is equal to its cost. The machine has an estimated useful life of 4 years.
3. The agreement requires equal annual rental payments of RM116,000 to PERISAI Bhd, beginning on 31 December 2019.
4. JCOV Bhd has guaranteed a residual value of RM38,500 to PERISAI Bhd.
5. JCOV Bhd’s incremental borrowing rate is 5%. PERISAI Bhd’s implicit rate is 4% and is known to JCOV Bhd.
The machine has an estimated residual value of RM33,500 at the end of the lease term. Its residual value after 4 years is expected to be only RM12,100. The machine will revert to PERISAI Bhd at the end of the lease term. Both companies depreciates similar assets on a straight-line basis.
REQUIRED:
(Round your answer to two decimal points)
(e) Determine the type of lease to PERISAI Bhd. Justify your answer as per MFRS 16 Leases.
(f) Prepare the journal entries at 1 January 2019 for PERISAI Bhd to record the leasing activities.
(g) Assuming that the above lease does not transfer substantially all the risks and rewards incidental to ownership of the leased asset, explain the accounting treatment for lease in the book of both companies.
Present Value Table
|
Periods (n) |
Present value of 1 |
Present value of an ordinary annuity of 1 |
Present value of an annuity due of 1 |
|||
|
4% |
5% |
4% |
5% |
4% |
5% |
|
|
3 |
0.88900 |
0.86384 |
2.77509 |
2.72325 |
2.88609 |
2.85941 |
|
4 |
0.85480 |
0.82270 |
3.62990 |
3.54595 |
3.77509 |
3.72325 |
|
5 |
0.82193 |
0.78353 |
4.45182 |
4.32948 |
4.62990 |
4.54595 |
|
6 |
0.79031 |
0.74622 |
5.24214 |
5.07569 |
5.45182 |
5.32948 |
|
7 |
0.75992 |
0.71068 |
6.00205 |
5.78637 |
6.24214 |
6.07569 |
Answer - e
The lease is covering 3 years out of 4 years of the life of the asset.
PV of al lease payments is covering substantially all of the fair value of the assets.
Hence this will be classified as Finance Lease by Lessor.
| Sr | Test Criteria | Response | Remarks |
| 1 | Ownership of Asset transfers to Lessee | No | |
| 2 | The agreement contains Purchase Option | No | |
| 3 | Lease Term cover 75% of Life of Asset | Yes | 75% |
| 4 | PV of MLP >=90% of Fair Value | Yes |
Answer - f
| Date | Yr | Payments | PV Factor at 4% | Present Value of Lease Payments |
| 0 | ||||
| 31.12.2019 | 1 | 116000 | 0.9615 | 111,538 |
| 31.12.2020 | 2 | 116000 | 0.9246 | 107,249 |
| 31.12.2021 | 3 | 116000 | 0.8890 | 103,124 |
| 31.12.2021 | 3 | 38500 | 0.8890 | 34,226 |
| Total PV of Cash Flow | 356,137 |
| Books of Lessor | |||
| Date | Account Title and Explanation | Debit | Credit |
| 01.01.2019 | Net Investment in Lease | 356,137 | |
| Equipment held for Lease | 370,000 | ||
| Revenue | 356,137 | ||
| Cost of Goods Sold | 370000 |
Sales Revenue is PV of all future payments receivable under the lease. The cost of an asset is compared to the sale revenue to calculate gain or loss.
Answer - G
For Interest expense and Depreciation, please refer the calculation table given below.
| Books of Lessee | |||
| Date | Account Title and Explanation | Debit | Credit |
| 31.12.2019 | Right to use Assets | 356,137 | |
| Lease Payable | 356,137 | ||
| Lease Payable | 101,755 | ||
| Interest Expense | 14,245 | ||
| Cash | 116,000 | ||
| Depreciation Expense | 118,712 | ||
| ROU Asset Accumulated Depreciation | 118,712 | ||
| 31.12.2020 | Lease Payable | 105,825 | |
| Interest Expense | 10,175 | ||
| Cash | 116,000 | ||
| Depreciation Expense | 118,712 | ||
| ROU Asset Accumulated Depreciation | 118,712 | ||
| 31.12.2021 | Lease Payable | 110,058 | |
| Interest Expense | 5,942 | ||
| Cash | 116,000 | ||
| Depreciation Expense | 118,712 | ||
| ROU Asset Accumulated Depreciation | 118,712 |
| Books of Lessor | |||
| Date | Account Title and Explanation | Debit | Credit |
| 31.12.2019 | Depreciation Expense | 89,475 | |
| Accumulated Depreciation | 89,475 | ||
| 31.12.2019 | Cash | 116,000 | |
| Lease Income | 116,000 | ||
| 31.12.2020 | Depreciation Expense | 89,475 | |
| Accumulated Depreciation | 89,475 | ||
| 31.12.2020 | Cash | 116,000 | |
| Lease Income | 116,000 | ||
| 31.12.2021 | Depreciation Expense | 89,475 | |
| Accumulated Depreciation | 89,475 | ||
| 31.12.2021 | Cash | 116,000 | |
| Lease Income | 116,000 |
| LESSOR | Depreciation Calculation | USD |
| Leased Assets | 370,000 | |
| Less : Residual Value | 12,100 | |
| Depreciable Value | 357,900 | |
| Life | 4 | |
| Depreciation | 89,475 |
As Ownership of the asset is not transferred under Lease to lessee, Depreciation is recogniosed over lease term.
| LESSEE | Depreciation Calculation | USD |
| Right to use Assets | 356,137 | |
| Depreciable Value | 356,137 | |
| Life | 3 | |
| Depreciation | 118,712 |
| Date | Payments | Interest @4% | The decrease in Lease Liability | Lease Liability O/s |
| Start | 356,137 | |||
| 31-Dec-19 | 116,000 | 14,245 | 101,755 | 254,382 |
| 31-Dec-20 | 116,000 | 10,175 | 105,825 | 148,558 |
| 31-Dec-21 | 116,000 | 5,942 | 110,058 | 38,500 |
| 31-Dec-21 | 38,500 | 38,500 | 0 |
