Reference no: EM132983774

Question - Mr. Brent, who just graduated in accounting, is auditing the company's financial statements for the year ended 31 December 2020. He noticed that on 1 January 2020, the company entered into a leasing contract with Cloud Bhd to lease a photocopy machine. The terms of the contract are as follows:

i. The non-cancellable lease term of 5 years.

ii. Lease rental of 3,500 per year (paid on every 31 December) and commencing on 31 Dec 2020.

iii. Platino Bhd guarantees the residual value of 2,500.

iv. The estimated economic life of the asset is 5 years.

v. The implicit rate and Platino Bhd's incremental borrowing rate is 6% per year.

In the company's accounting record, only the following journal entries for the photocopy machine are prepared for FYE 2020:

Dr. Leased asset 16,611

Cr. Lease liability 16,611

Mr. Brent asked Miss Mia, an account clerk, the reasons the company prepared such journal entries. Miss Mia explained that the transaction should be recognized as a finance lease based on MFRS117 Leases.

Required -

(a) Discuss whether the leasing transaction for the photocopy machine is appropriately recorded by Platino Bhd. (CTPS 1)

(b) Explain whether there is any implication to Platino Bhd when the company records the leasing transaction in accordance with MFRS 117. (CTPS 2)

(c) Discuss how Platino Bhd should account for the leasing transaction for the year 2020. Show the relevant calculations and journal entries, where appropriate. (CTPS 3, 4)