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MFRS 117 LEASES
Transcript of MFRS 117 LEASES
a) The lease transfers ownership of the asset to the lessee by the end of the end lease term
b) The lessee has the option to purchase the asset at the price that is expected to be sufficiently lower than the fair value at the date the option become exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised.
c) The lease term is for the major part of the economic life of the asset even if title is not transferred.
d) At the inception of the lease the present value of the minimum lease payments amount to at least substantially all of the fair value of the leased asset.
e) The leased assets are of such a specialize nature that only the lessee can use then without major modifications.
3. Explain the difference between a finance lease and an operating lease
According to MFRS 117, para 8
i) A lease that transfers substantially all the risk and rewards incidental to ownership of an asset.
ii) Title to the asset may or may not eventually be transferred.
iii) Lessee is the beneficial owner even though the legal title is with the lessor.
i) A lease that substantially all the risk and rewards incident to ownership of an asset are not transferred.
ii) Title to the asset will not be transferred.
iii) The legal and beneficial owner is the lessor.
2. With reference MFRS 117 Leases, identify the classification of asset acquired on 1 January 2014 and 1 July 2014. Support your answer with reasons.
1 January 2014
The asset acquired on the first 1 January 2014 will be classified as a finance lease. According to MFRS 117, para 8 the lease will be classified as a finance lease since there will be a transfer of ownership at the end of the lease term (GEM Bhd will take legal possession of the plant). The lease is also classified as a finance lease due to the lease tern being the major part of the economic life of the asset. The leased asset is also one of a specialized nature since it will be use to only make household product.
1 July 2014
The asset acquired on the 1 July 2014 will be classified as an operating lease due to the nature of the ownership of the asset on the end of the lease period. According to MFRS 117, para 36 the lease will be considered as a operating lease since the lease term will not be a major part of the economic life (3 years vs 10 years = > 50%). The asset would also not be in a specialize nature since the company can still run without it, making another point to classify it as operating lease.
1. In accordance with MFRS 117 Leases, explain the situations that would lead the leased asset being classified as a finance lease.
4. Compute and allocate the finance charges for asset acquired on 1 January 2014
Sum of digit
2014 4/10 x RM 400 000 = RM 160 000
2015 3/10 x RM 400 000 = RM 120 000
2016 2/10 x RM 400 000 = RM 80 000
2017 1/10 x RM 400 000 = RM 40 000
6. Prepare journal entries to record the sale and the lease back transactions in the books of the GEM Bhd for the year ended 31 December 2015
Dr Bank 850 000
Cr Machine 712 500
Cr Gain on disposal 87 500
Cr Deferred gain 50 000
Dr Depreciation 237 500
Cr Acc. depreciation 237 500
Dr Deferred gain 6 250
Cr Amortisation 6 250
Dr Lease rental 125 000
Cr Bank 125 000
5. Prepare journal entries to record the lease transactions in the book of GEM Bhd for the year ended 31 December 2014
Dr Machine 850 000
Cr Finance Lease 850 000
Dr Lease creditor 250 000
Cr Bank 250 000
Dr Lease Interest 160 000
Cr Lease creditor 160 000
Dr Depreciation 141 667
Cr Acc. Depreciation 141 667
Dr Contigent rent 1 500
Cr Bank 1500
Dr Rental Expenses 30 000
Cr Bank 30 000
9. Show the extract of Statement of Profit or Loss and Other Comprehensive Income in the books of GEM Bhd for the year ended 31 December 2015
Statement of Financial Position (extract) as at 31 December 2015
Non Current Asset Cost Acc.dep CA
Machine 950 000 237 500 712 500
Plant 850 000 283 334 566 666
Non Current Liability
Lease payable 380 000
Deferred gain 31 250
(50 000-12 500-6 250)
Lease payable 250 000
Deferred gain 12 500
10. Show the extract of Statement of Financial Position in the books of GEM Bhd as at 31 December 2015
Statement of Profit or Loss and Other Comprehensive Income (extract)
for the year ended 31 December 2014
Depreciation plant 141 667
Depreciation of machine 47 500
Contingent rent 1 500
Lease interest 120 000
Rental expenses 30 000
Lease rental 125 000
Gain on disposal 87 500
Amortization of deferred gain 6 250
Identification and Classification of an element
Measurement of an Element
Presentation and disclosure
MFRS 117 LEASES
Finance charges for asset acquired on 1 January 2014 is RM 160 000.
7. Discuss the accounting treatment of finance lease in the books of LIME Lessor Bhd for the year ended 31 December 2014.
According to MFRS 117 Leases, para 36, 37, 38 on 31 December 2014, . Amount of lease which is RM 850 000 in SOFP. LIME Lessor will treat interest income 4/10 x 400 000= RM 160 000 (in advance) as other income under SOPL. Since the leaseback financing of leases, LIME Lessor Bhd will recognize rental income RM 250 000 per year as other income under SOPL. Contigent rent received amounted RM 1500 also treated as income. RM 510 000 (RM 760 000 - RM 250 000) lease receivables will treat as non-current asset and RM 250 000 as current asset under SOFP.
8. Discuss accounting treatment for the contingent rent incurred in 2014.
Notes to the account
Finance lease (280 000 x 4) 1 120 000
(-) allocated finance charge (120 000)
1 000 000
Group Members :
ABDUL MUKHLIS BIN ABDUL HADI 2015152363
AHMAD SYAMIR BIN AHMAD SUHAIMI 2015136753
AIDA SUZANA BINTI ABU BAKAR 2015140615
FATIN NURSYIFA BINTI MD JOHARI 2015126017
NOR HALEEDA BINTI MOHD KHALID 2015180481
NURUL AIDA AZLINA BINTI WAHID 2015138981
According to MFRS 117, para 4 leases contigent rent is provision of lease payments that is not fixed in amount but based on the future amount of a factor that changes other than with the passage of the time. In the year 2014, since the contigent rent has been incurred RM 1 500, it will be treated as other expenses under SOPL in the books of GEM Bhd. As for Lime Lessor Bhd, the contigent rent is recognised as income in their income statement as it is payment received from GEM Bhd.