Moonlight Bhd is a construction company that involves in building construction of commercial and cultural complexes such

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Question:

Moonlight Bhd is a construction company that involves in building construction of commercial and cultural complexes such as shopping malls and other public buildings. At the end of 2020, the management team members decided to have a new modular scaffolding to support the construction activities. They asked the accountant of the company to justify whether to choose lease or longterm loan financing in order to acquire the scaffolding. On 1 January 2021, the company signed a non-cancellable lease agreement to lease a modular scaffolding system from Tanjung Bina Bhd.

The following information is related to the lease agreement.

i. The term of the lease is 4 years with no renewal option.

ii. The cost and the fair value of the asset at the inception date is RM500,000.

iii. The straight-line method is used to depreciate the asset and the useful life of the asset is 5 years.

iv. The implicit rate which is known by both parties is 8% and the incremental borrowing rate for Moonlight Bhd is 7%. v. The agreement requires equal annual rental payments of RM95,000 to Tanjung Bina Bhd, beginning on 31 December 2021.

vi. Moonlight Bhd guarantees a residual value of RM35,000 at the end of the lease term.

vii. The scaffolding has an estimated residual value of RM30,000 at the end of the lease term and the residual value after 5 years is expected to be only RM20,100. Moonlight Bhd closes its account on every 31 December.

REQUIRED: (Round all numbers to the nearest RM)

(a) Determine the present value of lease payments for Moonlight Bhd.

(b) Prepare amortization schedule for Moonlight Bhd for the first TWO (2) years of the lease term.

(c) Prepare all related journal entries for Moonlight Bhd to record the leasing activities for the year ended 31 December 2021.

(d) Determine the type of lease to Tanjung Bina Bhd. Justify your answer as per MFRS 16 Leases. 3

(e) Assume that the fair value of the scaffolding at the end of lease term is RM37,000. Prepare journal entries for Moonlight Bhd and Tanjung Bina Bhd at the end of lease term.

(f) As an accountant of the Moonlight Bhd, explain TWO (2) rationales for the management team to choose lease instead of loan financing.