Question

On 30 September 2019, Getah Glove Bhd entered into an arrangement with Maju Bhd. Maju Bhd had purchased a machine from Getah Glove Bhd, but due cash flows problems the company arranged a sale and leaseback of the machine to Getah Glove Bhd. This machine has a carrying amount of RM105,000.

Maju Bhd will sell the machine to Getah Glove Bhd for RM93,432 and immediately lease it back for four years at a rental of RM28,125, payable yearly in advance. It was agreed that the machine should revert to Getah Glove Bhd at the end of the four-year period with no scrap value. The lease is non-cancellable and interest rate implicit in the lease is 14%. Maju Bhd depreciates the machine on straight line basis.

The impact of pandemic Covid-19 had tremendously increased the demand of medical supplies produced by Getah Glove Bhd particularly the face masks and gloves. Getah Glove was considering to buy a plant at RM175,000 to expand its operating capacity on 1 April 2020. Its guaranteed residual value at the end of lease term is estimated to be RM10,000.

Unfortunately, the liquidity of Getah Glove was not sufficient for this investment. Getah Glove was unable to buy the required plant. Glove entered into an agreement to lease the plant from the manufacturer to resolve the problem. The lease required four annual payments in advance of RM50,000 each commencing on 1 April 2020. The plant would have a useful life of five years and will be disposed at the end of this period. The implicit interest rate is 10% per annum. The account was ascertained that the lease was to be an operating lease. He commented that the agreement would improve the company’s return on capital employed as compared to an outright purchase of the plant.

c) Discuss how the lease on plant should be treated by Getah Glove according to MFRS 16.

(CLO2:PLO2:C2)

ACCT2131/June2020 Page 2 of 8

d) Compute the present value minimum lease payment of leasing contract of the plant. Determine the lease liability.

(CLO2:PLO2:C3)

e) For the lease of plant, prepare:

i. extract of Statement of Profit or Loss

ii. extract of Statements of Financial Position for the years ended 30 September 2020

(CLO2:PLO2:C3)

Answer 1

c. MFRS 16 requires that a lessee applies a Right of Use assets method under which a lessee shall recognise an asset on the face of balance sheet, for underlying lease representing its right to use the asset during the lease term and shall also recognise a corresponding liability for payments. Lessee's balance sheet will show increase in both assets and liabilities wherein EBITDA will increase and cash flow from operations will go up & cash flow from financing will decrease. This will also significantly impact gearing ratios.

Accordingly, Getah Glove shall record present value of rental payment i.e. 50,000 at 10% impicit rate as ROU asset and lease liability at the lease inception. Every year end, Getah Glove shall record interest expenses and depreciaition for amortization of ROU assets.

d. Lease liability is 174,343. Below is working-

Year	Lease rent	PV factor @ 10%	PV of rent	Interest expenses	Depreciation	WDV of ROU asset	Lease liability
1	50,000	1.0	50,000	12,434	43,586	130,757	136,777
2	50,000	0.9	45,455	8,678	43,586	87,171	95,455
3	50,000	0.8	41,322	4,545	43,586	43,586	50,000
4	50,000	0.8	37,566	0	43,586	-	-
	Total		174,343	25,657	174,343

f. Below is extract of statement of profit and loss as on 30 September 2020

Extract of Statement of profit and loss for the year ended 30 September, 2020
Income / expenses	Amount
Earnings before interest, depreciation and tax
Interest expenses	6,217
Earnings before depreciation and tax	(6,217)
Depreciation of ROU	(21,793)
Earnings before tax	15,576

Below is extract of Balance Sheet as on 30 September 2020

Extract of Statement of Balance Sheet as on 30 September, 2020
Assets/ Expenses	Amount
Assets
Right of use assets	152,550
Liability
Lease liability	130,560