Prepare amortization schedule for ambc bhd

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Reference no: EM132771741

In December 2018, AMBC Bhd increased the operating capacity of its business. Due to a lack of liquid funds AMBC Bhd was unable to buy the required machine which had a cost of RM370,000. On the recommendation of the finance director, on 1 January 2019, AMBC Bhd entered into an agreement to lease the machine from PEDANG Bhd.

The following information relates to this agreement:

1. The term of the non-cancelable lease is 3 years with no renewal option.

2. The fair value of the machine on 1 January 2019 is equal to its cost. The machine has an estimated useful life of 4 years.

3. The agreement requires equal annual rental payments of RM116,000 to PEDANG Bhd, beginning on 31 December 2019.

4. AMBC Bhd has guaranteed a residual value of RM38,500 to PEDANG Bhd.

5. AMBC Bhd's incremental borrowing rate is 5%. PEDANG Bhd's implicit rate is 4% and is known to AMBC Bhd.

The machine has an estimated residual value of RM33,500 at the end of the lease term. Its residual value after 4 years is expected to be only RM12,100. The machine will revert to PEDANG Bhd at the end of the lease term. Both companies depreciates similar assets on a straight-line basis.

REQUIRED:

Question (a) Determine the present value of lease payments for AMBC Bhd and prepare the related journal entries on 1 January 2019.

Question (b) Prepare amortization schedule for AMBC Bhd for the first two (2) years of the lease term.

Question (c) Prepare the journal entries for AMBC Bhd to record leasing activities during the first year of the lease term.

Reference no: EM132771741

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