Question

Daly bhd. is a leasing company that enters into 5-year lease (that does not allow cancellation) for equipment with Krause Bhd. on 1 january 2019. The equipment has an estimated life of 6 years and a fair value of RM 1,800,00 at the commencement of the lease. in addition, the leased equipment is of a specialized nature such that only Krause Bhd. can use the equipment without major modifications being made. The lease contains the following provisions:

rental payments of RM 200,000, payable at the beginning of each 6-month period, throughout the lease period.

it is expected that Daly Bhd. will realize rm 100,000 from selling the assets at the expiration of the lease. however, the actual residual value is expected to be rm60,000. the residual value is not guaranteed by Klause Bhd. Krause's incremental borrowing rate is 8%. Krause uses the straight line method to depreciate its assets.

(a) related journal entries for the year 2019 in the books of Krause Bhd ( include amortization schedule through 1 January 2020)

(b) prepare the statements of profit or loss and statements of financial position as at 31 December 2020  

Answer 1

Period	Lease Payment	PV Factor @4%	Present Value $
1	200,000	1	200,000
2	200,000	0.96154	192,308
3	200,000	0.92456	184,911
4	200,000	0.88900	177,799
5	200,000	0.85480	170,961
6	200,000	0.82193	164,385
7	200,000	0.79031	158,063
8	200,000	0.75992	151,984
9	200,000	0.73069	146,138
10	200,000	0.70259	140,517
Total	2,000,000		1,687,066

(a)	Date	Account Titles	Debit $	Credit $
	January 1,2019	Right of use assets	1,687,066
		Lease liability		1,687,066
	January 1,2019	Lease liability	200,000
		Cash		200,000
	July 1,2019	Lease liability	140,517
		Interest Expense	59,483
		Cash		200,000
	December 31,2019	Amortization Expense	337,413
		Right of use assets		337,413
		(1,687,066 / 5 )
	December 31,2019	Interest Expense	53,862
		Interest Payable		53,862

	Amortization
	Schedule
	Date	Lease Payment	Interest Expense @4%	Reduction in Lease	Lease
				Liability( Payment-Expense)	Liability
	January 1,2019				1,687,066
	January 1,2019	200,000	-	200,000	1,487,066
	July 1,2019	200,000	59,483	140,517	1,346,549
	January 1,2020	200,000	53,862	146,138	1,200,411
	July 1,2020	200,000	48,016	151,984	1,048,427

(b)	Profit or Loss Statement	Amount $
	Interest Expense	113,345
	(59,483 + 53,862 )
	Statement of Financial Position
	Non-current Assets
	Right of use assets	1,349,653
	(1,687,066 - 337,413 )
	Non-current Liabilities
	Lease liability	1,048,427
	(1,346,549 - 146,138 - 151,984 )
	Current Liabilities
	Lease liability-Current portion	298,122
	(146,138 + 151,984 )