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In December 2018, JCOV Bhd increased the operating capacity of its business

Accounting

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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