RyZ Bhd$.$ had entered into a contract on $1$ July $2022$ to lease a building at Lot $20$ from its owner, Shank Bhd$.$ for five years with an option to extend the lease for another five years. On this date, RyZ Bhd$.$ had paid an initial deposit of RM$3,500,000,$ which was not refundable but can be offset against the last rental payable. The yearly rental in the first five years was RM$6,000,000$ payable in arrears at the end of each year commencing in $2023$ and RyZ Bhd$.$ had no intention to extend the lease. The lifts in the building have an economic useful life of five years. At the end of the lease, Route Bhd$.$ was required to replace all the lifts in the building before handing it back to the owner. The estimated replacement costs at the end of the lease period $($discounted to present period$)$ were RM$2,600,000$ while legal fees and other replacement costs incurred was RM$800,000.$ The implicit interest rate in lease was $6\%$ per annum and the relevant discount factors are as follows:

Period

Discount factor @ $6\%$

$1$

$0\mathrm{.}943396$

$2$

$0\mathrm{.}889996$

$3$

$0\mathrm{.}839619$

$4$

$0\mathrm{.}792094$

$5$

$0\mathrm{.}747258$

Required:

Briefly explain how RyZ Bhd$.$ shall treat the lease building.

 

 

Answer rating: 100% (QA)

Based on the information provided RyZ Bhd entered into a lease agreement with Shank Bhd to lease a building for five years with an option to extend fo... View the full answer