Reference no: EM132558266

Reene Berhad sign a lease agreement with Branded Berhad on 1 January 2015 to lease a drying machine. The lease term is non- cancellable lease for 5 years with bargain purchase option and the title of the machine is to be passed to Branded Bhd at the end of the lease term. The fair value of the machine as at 1 January 2015 was RM90,000 with the initial direct cost of RM2,500 paid by Reene Bhd.

The terms of lease agreement are as follows:

Annual rental payments (paid at 31 December) = RM 20,000

Estimated economic life = 5 years

Guaranteed residual value = RM 5,000

Interest rate implicit = 10%

note: Assume financial year of Branded Berhad ends every 31 December.

Required:

Question i) Identify the type of lease in the case above and justify your answer based on the standard.

Question ii) Prepare the related journal entries for the year ended 2017 in the books of Branded Berhad.

Question iii) Explain the impact of treating the lease arrangement above as an operating lease.