Question

Question 4(a)

On January 1, 2017, Kekwa Textiles leased a building with two acres of land from Zul Arifin development. The lease is for 10 years.

No purchase option exists and the property will revert to Zul Arifin at the end of the lease. The building and land, combined to have a fair market value on 1 January 2017, at RM 1,450,000; and the building has an estimated life of 20 years with a residual value of RM150,000.

The lease calls for Kekwa to assume all costs of ownership and to make annual payments of RM200,000 due at the beginning of each year.

On 1 January 2017, the estimated value of the land was RM400,000. Kekwa uses the straightline method of depreciation and pays 10% interest on borrowed money. Zul Arifin’s implicit rate in unknown.

In situation where the land is less than 25% of the combined fair value, both the lessee and the lessor will treat the land and building as a single unit.

Required:

Note : Question (i) and (ii) have two separate assumptions and are not related.

(i) Prepare journal entries for Kekwa textiles for 2017, and justify your answer. Assume the land could be leased without the building for RM59,000 each year. (6 marks)
(ii) Assuming the land had a fair value of RM200,000 on 1 January 2017, and could be leased alone for RM30,000, prepare journal entries for Kekwa Textiles for 2017.

(4 marks)

Answer 1

(i)

Journal entry for Kekwa Textiles :

1. Lease Rental A/c dr. RM 59000

To Zul Arifin Development   cr. RM 59000

Profit and Loss Ac dr. RM 59000

To Lease Rental A/c cr. RM 59000

At the time of payment in books of Kekwa Textiles

Zul Arifin Development dr. RM 59000

To Bank A/c cr. RM 59000

2.

1. Lease Rental A/c dr. RM 30000

To Zul Arifin Development   cr. RM 30000

Profit and Loss Ac dr. RM 30000

To Lease Rental A/c cr. RM 30000

At the time of payment in books of Kekwa Textiles

Zul Arifin Development dr. RM 30000

To Bank A/c cr. RM 30000