Answer Scheme – Leases

a) The lease is a finance lease because:

i) The title is transferred to lessee at the end of the lease period;
ii) There is a bargain purchase option; and
iii) The present value of the minimum lease payment (PVMLP) amounts to almost
substantially all the fair value of the equipment.

b) PVMLP = (25,000 x 3.791) + (20,000 x 0.621)

= 94,775 + 12,420
= 107,195

PVMLP = 107,195
FV = 110,000
The lower amount between FV and PVMLP is RM107,195. Therefore, the initial amount of
the assets is RM107,195

c) Total finance charge of the lease:

RM
Total instalment = 25,000 x 5 125,000
PVMLP 107,195
Total finance charge 17,805

d) Prepare the journal entries for the year 2022.

Dr Cr
RM RM
1 Jan
2022 Dr Lease equipment 107,195
Cr Lease liability 107,195

31 Dec
2022 Dr Lease interest expenses 10,720
Cr Lease liability 10,720
(107,195 x 10%)

Dr Depreciation expenses 13,399

Cr Accumulated depreciation 13,399
(107,195 / 8)

Dr Lease liability 25,000

Cr Bank 25,000
e) Show the charges in the Statement of Profit or Loss from year 2022 until year 2026.

Statement of Comprehensive Income for the year ended 31 Dec

2022 2023 2024 2025 2026
RM RM RM RM RM
Depreciation expenses 13,399 13,399 13,399 13,399 13,399
Finance charge 10,720 9,291 7,721 5,993 4,081
Service charge 5,000 5,000 5,000 5,000 5,000

Tutorial Question 2

a) The lease is finance lease because:

i) The term constitutes the ‘major part’ of the equipment estimated useful life (10 lease
period/12 useful life = 83%)
ii) The present value of the minimum lease payment (PVMLP) amounts to almost
substantially all the fair value of the equipment.

b) Compute the amount of each of the following items:

i) Lease receivable at inception of the lease

PVMLP = (125,000 + (125,000 x 5.75902)) + (37,500 x 0.38554)

= 844,878 + 14,457
= 859,335

ii) The selling price = 859,335

iii) Cost of sales = 525,000

c) Prepare a 10-year lease amortization schedule.

Annual Lease Lease

Beginning of Lease
payment plus Interest (10%) receivable
Year receivable
Residual Value recovery
a b c
RM RM RM RM
Initial PV - - - 859,335
1 125,000 - 125,000 734,335
2 125,000 73,434 51,566 682,769
3 125,000 68,277 56,723 626,046
4 125,000 62,605 62,395 563,650
 5 125,000 56,365 68,635 495,016
6 125,000 49,502 75,498 419,518
7 125,000 41,952 83,048 336,470
8 125,000 33,647 91,353 245,117
9 125,000 24,512 100,488 144,628
10 125,000 14,463 110,537 34,091
End of year 10 37,500 3,409 34,091 0
1,287,500 428,165 859,335 5,140,976

d) Prepare all of Tawakal Berhad' s journal entries for the first year of the lease.

Dr Cr
RM RM
Beginning Dr Lease receivable 859,335
Cr Equipment 859,335

Dr Bank 125,000
Cr Lease receivable 125,000

End of first year Dr Lease receivable 73,434

Cr Interest income 73,434