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

Ans:

The lease discussed in the above question is Financial Lease as the term of the lease is that it is non-cancellable along with the title of the machine is transferred to the lessee Branded Berhad at the end of the lease term. Therefore, this is a Financial Lease.

AS 19 " Leases" also provides the difference between an Operating lease & Financial Lease . In financial Lease title with risk & rewards is transferred to lessess at the end of the term of lease however this is not a case in Operating lease.

Ans2. Lease Rentals Calculation & Journal Entries in books of Branded Berhad

Yr	Lease Rent	Discounting	Amount
2015	20,000.00	0.91	18,181.82
2016	20,000.00	0.83	16,528.00
2017	20,000.00	0.75	15,026.00
2018	20,000.00	0.68	13,660.00
2019	20,000.00	0.62	12,418.00
2019	5,000.00	0.62	3,104.50

Dec 2017

Lease Rentals Account Dr 15026

To Cash Account 15026

(being Lease rentals paid for 2017)

Ans 3 If such lease shall be operating lease then no ownership will be transferred at the end of lease term & shall not be treated as an asset of the company after 5 years like in Financial Lease & therefore no depreciation shall be charged on that machine.