Question

XX enters into a leasing agreement with TT on 1 January 2021 for equipment costing RM 380,000. The lease agreements require payment of five equal installments of RM 100,000 payable in arrears (at the end of the year). The asset is expected to have a useful year of 5 years. At the end of the lease, the asset has no residual value and the lessor cannot lease this asset to others as it is a specialized asset. The implicit rate of the lease is 10%. 

Required: 

a) Determine whether the lease is a finance or operating lease. (3 marks)

 b) Determine the initial amount to be recognized in the books of XX. (13 marks) 

c) Calculate the finance cost of the lease from 2021 to 2025. (10 marks)

 d) Calculate the annual depreciation. (2 marks) 

e) Show the Income statement and Statement of Financial Position extract for 2021 and 2022.

Answer 1

a) The lease is a finance lease:

Explanation: The asset life and lease period are 5 years that means the asset is leased for its' whole life, and it has no salvage value; hence, it is a finance lease.

b) The initial amount of lease to be recognized in the book s of \(X X\) is \(\$ 379,078\)

Compute the amount as follows: -

Compute the amount as follows: -

Initial Amount = Annual Lease Rental x Present Value Annuity factor at \(10 \%\) for 5 years

$$ =\$ 100,000 \times 3.790786 $$

Initial Amount is \(\$ 379,078\).

Explanation: The initial amount to be recognized is computed by multiplying the annual lease rental by the present value annuity factor.

The initial amount to be recognized is \(\$ 379,078\).

c) Compute the finance cost of lease from 2021 to 2025 as follows: \(-\)

Finance Cost = Total Lease Rental Payable - Initial Cost

$$ \begin{aligned} &=(\$ 100,000 \times 5)-\$ 379,078 \\ \text { Finance Cost } &=\$ 120,921 \end{aligned} $$

The total finance cost is \(\$ 120,921\)

d) Compute annual depreciation as follows: -

Annual Depreciation = (Cost of Asset - Salvage Value)/Asset Life

$$ =(\$ 379,078-\$ 0) / 5 $$

Annual Depreciation \(=75,816\) (rounded).

Annual Depreciation is \(\$ 75,816\).