BKAR2023 FINANCIAL ACCOUNTING AND REPORTING II (A222)

MINI CASE 8:
LEASES

DUE DATE: 6 JULY 2023

Guidelines for submission:

1) Please answer all questions.

2) Please write your name, matric number, and group on the header and page number at
the bottom of your answer document.

3) The mini case is an individual task; however, the discussion is allowed, but copying
other students’ answers is forbidden.

4) Your answer should be handwritten and subsequently scanned with a scanner or

mobile scanner app in a combined PDF file. The scanned document must be clear,
easily readable, and complete. Photo is not allowed.

5) Submit your scanned answer via the Online Learning portal →

within the allotted time and period, before 11.00 P.M., 6 July 2023 (MYT). Only one
submission will be accepted.

1
QUESTION 1

On 1 January 2021, Lucky Bhd enters into a five-year non-cancellable lease agreement with
Health Bhd to lease a customised printing machine. The printing machine has been assembled
according to the requirements of Lucky Bhd since the year 2020. The information related to the
lease agreement is stated as follows:
i. The cost and market value of the printing machine on 1 January 2021 is RM800,000.
ii. The annual lease payment is RM175,000 payable to Health Bhd beginning on 31 December
2021.
iii. Lucky Bhd pays RM15,000 for assembling the printing machine.
iv. The implicit rate which is known by both parties is 6%, while the borrowing rate for Lucky
Bhd is 5%.
v. Lucky Bhd guarantees a residual value of RM40,000 at the end of the lease term.
vi. The estimated residual value of the printing machine at the end of the lease term is
RM45,000.
vii. The expected useful life of the printing machine is eight (8) years. Both companies
depreciate the printing machine using the straight-line method.
viii. The printing machine is returned to Health Bhd at the end of the lease term and both
companies' financial year ends on 31 December.

REQUIRED:
(Show details of working and round all numbers to the nearest RM)

(a) Prepare all the journal entries for Lucky Bhd for the financial year 2021.

(b) Prepare all the journal entries for Health Bhd for the financial year 2021.

(c) Assume that the fair value of the printing machine on 31 December 2025 is RM42,000.
Prepare all the relevant journal entries for Lucky Bhd and Health Bhd on 31 December
2025.

(d) On 1 January 2022, Wealth Bhd enters into a lease agreement with Happiness Bhd to
lease a digital water dispenser for 10 months. The lease payment is RM2,800 per month,
payable at the end of each month. The borrowing rate for Wealth Bhd is 5% per annum.
Wealth Bhd has decided that the digital water dispenser should not be recognised as a
‘right-of-use asset’ and the monthly amount due to Happiness Bhd should also not be
recorded in the balance sheet as a ‘lease liability’.

Explain whether you agree OR disagree with the accounting treatment chosen by Wealth
Bhd to record the digital water dispenser.

2
QUESTION 2

Gold Bhd is a multinational company that operates in Bayan Lepas, Penang. The company closes
its account on 31 December and has the policy to depreciate all property, plant and equipment
(PPE) on a straight-line method. Presented below are the lease agreements of Gold Bhd.
Lease Agreement 1: Diamond Bhd
Gold Bhd owns a building and includes it under PPE in the company’s statement of financial
position at the cost of RM5 million in 2018. On 1 January 2019, Gold Bhd entered into a non-
cancellable lease agreement with Diamond Bhd to lease the building for a lease term of six (6)
years. The agreement requires Diamond Bhd to pay a rental of RM480,000 annually at the end of
each financial year.
At the end of the lease term, Diamond Bhd has an option to purchase the building at RM4
million and it is reasonably certain that Diamond Bhd will exercise the purchase option. The
current market price of the building is equivalent to the cost. The implicit interest rate and
borrowing rate of the building are 4% and 5% per annum, respectively. The building is expected
to have a useful life of 50 years. Diamond Bhd uses the straight-line method to depreciate the
building and closes its accounts on 31 December.
Lease Agreement 2: Topaz Bhd
On 1 January 2020, Gold Bhd entered into a lease agreement with Topaz Bhd. Under the terms
of the agreement, Topaz Bhd provides Gold Bhd with a machine for a lease term of five (5) years
in exchange for an annual lease payment of RM54,000, payable at the financial-year end of both
companies, 31 December. The market value and cost of the machine on the commencement date
of the lease is RM275,000. While the interest rate implicit in the lease is 6%, the borrowing rate
for the lease is 7%, known by both parties. At the end of the lease term, the machine is expected
to be returned to Topaz Bhd. The new account clerk of Gold Bhd has recorded the first lease
payment as ‘Dr. Rental Expense RM54,000’ and ‘Cr. Bank RM54,000’. No other accounting
entries have been made in relation to the lease by Gold Bhd. The useful life of the machine is
estimated to be eight (8) years.

REQUIRED:
(Round your answer to the nearest RM)

(a) Prepare all the journal entries for Gold Bhd for the financial years 2019 and 2020. Show
all workings.

(b) Assume that Topaz Bhd depreciates the machine based on the straight-line method,
discuss the accounting treatments for the leasing transaction for Topaz Bhd for the
financial year 2020. Support your answer with necessary workings and journal entries,
where appropriate.

3
QUESTION 3

Tulga Bhd enters into a five-year lease agreement of a machine, which has a cost and market
value of RM2.95 million, with Gamze Bhd on 1 January 2018. The lease payments are
RM600,000 per year, payable at the end of the financial year. The financial year-end of both
companies is 31 December. To obtain the lease, Tulga Bhd paid a one-time commission fee of
RM10,000 to the agent for arranging the lease and RM5,000 for the delivery of the machine. At
the commencement date of the lease, the implicit interest rate of the machine known by Tulga
Bhd and Gamze Bhd is 5%. Tulga Bhd and Gamze Bhd use the straight-line method to
depreciate the machine. The machine is estimated to have a useful life of 10 years and a salvage
value of RM30,000 at the end of its useful life. The machine is returned to Gamze Bhd at the end
of the lease term.

REQUIRED:
(Round all numbers to the nearest RM).
(a) Determine the cost of the machine for Tulga Bhd on 1 January 2018.

(b) Prepare all the related journal entries for Tulga Bhd for the financial year 2018.

(c) Discuss the type of lease arrangement for Gamze Bhd.

(d) Prepare all the related journal entries for Gamze Bhd for the financial year 2018.