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Calculate the present value of minimum lease payments

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Reference no: EM132792027

Question - On 1 January 2014, Divo Bhd entered into two leasing contracts with Seb Bhd. (the lessor). The contracts took effect on the same date. The details are as follows:

Contract 1 - Leasing of a lifting machinery for use in the finished goods warehouse. The annual rental rate of RM36,000 is payable in advance, for a period of three years. The fair value of the equipment is RM270,000 and its useful life is 8 years.

Contract 2 - Leasing for plant, at an annual rate of RM120,000 payable in arrears, for a period of five years. The fair value of the plant is RM454,500. The economic life is six years and at the end of the lease period, Divo Bhd will not take legal possession of the plant. Depreciation is provided on a straight-line basis. Its estimated residual value is zero.

Finance charges are at the rate of 10% per annum on the balance of the outstanding obligation.

(a) With reference to above:

i. State the main standard applicable to the above situation.

ii. Classify the lease for Divo Bhd. Provide reasons for the classification assigned to each contract.

iii. Calculate the present value of minimum lease payments for the contract(s) classified under finance lease.

Reference no: EM132792027

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