Reference no: EM132553935

On 1 January 2018, VIVI Bhd (VIVI), a company which operates a retail business, signed a contract to lease a shop lot at Quill City Mall from Wealthy Properties Bhd (WP). The lease term is for five (5) years, non-cancellable, non-renewable, and contains rights to use and maintain the shop lot at lessee's own discretion during the lease term. The fair value of the shop lot on 1 January 2018 is RM650,000 and it has an estimated economic useful life of 40 years.

According to the lease agreement, VIVI is required to pay a lease payment of RM60,000 annually starting from 31 December 2018. Given that VIVI's incremental borrowing rate is 12%, meanwhile WP's implicit rate is 10%, which is known by both parties. Additionally, the lease agreement contains an option for VIVI to purchase the shop lot at the end of the lease term at a value of RM450,000. It is expected that VIVI will take this option at the end of the lease term. However, VIVI does not provide any guarantees to the residual value of the shop lot.

Both VIVI and WP use MFRS 16 Leases in accounting for leasing activities. Both companies depreciate their assets using a straight line method.

REQUIRED:

(Round all numbers to the nearest RM).

Question (a) Determine whether the contract contains a lease or not in accordance to Paragraph 9 of MFRS 16 Leases.

Question (b) Determine the present value of lease payments for VIVI Bhd on 1 January 2018. Do a lease amortization table for the year 2018 until year 2019.

Question (c) Prepare the journal entries for VIVI Bhd to record the leasing activities during the year 2018.

Question (d) Prepare the journal entries for Wealthy Properties Bhd to record the leasing activities during the year 2018.