Accounting for Leasing n Borrowing Cost (1)

FINANCIAL
ACCOUNTING:

LEASING & BORROWING COST

DANIZAH BINTI CHE DIN
ISRATUN BINTI IDRIS

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

First published by
Jabatan Perdagangan
Politeknik Seberang Perai
Jalan Permatang Pauh
13500 Permatang Pauh
Pulau Pinang, Malaysia
Tel: 604-538 3322 Fax: 604-538 9266
www.psp.edu.my

First Edition 2021

 All rights reserved. No part of this publication may be reproduced, duplicated,
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addressed in writing from Politeknik Seberang Perai as the main publisher. While
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responsibility can be accepted for any errors, feedback for imrpovement in future

editions.

i

ALL RIGHTS RESERVED

No part of this publication may be translated or reproduced in any retrieval
system or transmitted in any form or by any means, electronic, mechanical,
recording, or otherwise, without prior permission in writing from Politeknik

Seberang Perai.

PUBLISHED BY

Politeknik Seberang Perai
Jalan Permatang Pauh, 13500 Permatang Pauh

Pulau Pinang

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ACKNOWLEDGEMENT

The authors would like thank the Head of
Commerce Department, Head of DAT Program and
all the colleagues in the Commerce Department for
their directly or indirectly contributions and efforts
in helping them completing this e-book.Not
forgetting to the family members for their endless
support and patience throughout the process of
writing.Without those support and courage, this e-
book might not complete.

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PREFACE

Financial Accounting : Leases and Borrowing Cost
is published in a form of e-book mainly to provide
the user especially the accounting lecturers,
facilitators and accounting students to understand
the concepts and accounting approach on leases
and accounting borrowing cost under MFRS 16
and MFRS 108. This e-book is considered as an
innovation to the authors during the pandemic
Covid-19 in order to provide online references to
all the accounting users especially those who
involved in accounting online education.
The content of this e-book were drafted and
compiled using the latest and updated Malaysian
Financial Reporting Standards for leasing and
borrowing costs.Each of the standards discussed
in this e-book is accompanied by examples and
exercises to enhance the users understanding.

Danizah Binti Che Din
Isratun Binti Idris

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CONTENTS Photographed by
Danizah
THE BASICS

iii Acknowledgement
iv Preface


References

MFRS 16 - LEASE

1 Introduction to Leasing
2 Advantages of Leasing
3 Overview of MFRs 16
6 Lessee Accounting Model
9 Lessee - Single Asset Lease
11 Presentation and Disclosure in

Lessee

12 Tutorial Questions

MFRS 123 - BORROWING COST
15 Introduction to Borrowing Cost
16 Overview of the MFRs 123
18 Types of Borrowing Cost
20 Commencement of

Capitalisation

21 Suspension of Capitalisation
22 Cessation of Capitalisation
23 Tutorial Questions

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MFRS 16 LEASE

Introduction to Leasing LEARNING OBJECTIVES:

Leasing is a formal written By the end of this topic, student should
contractual agreement between the be able to:
owner of the underlying assets (Lessor)
and the user of those underlying assets 1. Describe the environment
(Lessee). This agreement is to give lessee related to MFRs 16.
the right to use or control the underlying
assets for a certain period. In return, 2. Explain the accounting for
lessee need to pay certain amount as a leases in terms of lessee’s
rental to the lessor. The payment should perspectives.
be periodically either at the beginning of
accounting period or at the end of 3. Show the transactions in
accounting period which stated in the lessee’s accounting book.
agreement.
4. Perform the presentation and
The right to control the underlying disclosure of lease transactions
assets means lessee has the right to obtain in the Financial Reporting
substantially all the economic benefits Statements.
from the use of the assets and has the right
to create their own rules of using the
assets. However, lessee are prohibited
from making any changes or improvement
on the assets without the approval from
lessor.

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Advantages of Leasing

The advantages of leasing can be divided into TWO perspectives – Lessee and Lessor.

In the Perspective of Lessee
The following is the significant advantages of leasing in the perspective of lessee:

100% Financing at Fixed Leases are often signed up without requiring
Rates any upfront or deposits from the lessee. This
helps the lessee to converse the available cash
flow into other business or investment. In
addition, the rental payment or the lease
payment often remained fixed, which protects
the lessee from experiencing the inflation and
increases in the cost of money.

Avoid Using Obsolescence Leasing reduces risk of obsolescence assets to
Assets the lessee. Lessee may change the old model
of assets with the new model at any time
without worrying of the rapid changes in the
assets model or functions.

Flexibility Leasing agreement normally contain less
restrictive provisions than other debt
agreements. Lessee may purchase the asset
at the end of the agreement period if lessee
thinks the asset is worth and very useful

In the Perspective of Lessor
The following is the significant advantages of leasing in the perspective of lessor:

Profitable Interest When a lessor lease the particular asset to a lessee,
Margin lessor will receive a fix income which known as
lease payment or rental payment from the lessee
for a certain period. The lease payment is an
amount of the rental and the interest. The interest
from this payment is consider a profit to lessor

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Tax Benefit When a lessor lease the particular asset to a lessee, he
can enjoy the tax benefit (amount of tax that can be
saved) from that particular asset depreciation.

High Residual Value Upon the return of the particular asset at the end of
the lease term, the residual value can sometimes
provide large profit

Overview of the MFRs 16

MFRs 16 Leases was effectively used in Malaysia on 1st January 2019 replacing the
existing MFRS 117 and its related interpretations. MFRS 16 Leases is intended to provide
greater transparency by eliminating off-balance sheet leasing transactions. This standard
features a single model accounting approach for lessees. There will be no longer segregation
between finance and operating lease. MFRS 16 requires lessee to recognise the “right-of-
use” approach in its conceptual framework. The leased asset will be presented in lessee’s
balance sheet under non-current asset category as the right to use. The remaining amount
of unpaid lease will be recognised as lease liability under non-current liability category in the
balance sheet. The liability will show an increased in the current year operating due to an
increased its interest expense and asset amortisation.

Scope of MRFs 16
Paragraph 3 has stated that this standard apply to all leases including the leases of

right-of-use assets in a sublease, except for:
i. Leases to explore for or use minerals, oil, natural gas and similar non-
regenerative resources.
ii. Leases of biological assets within the scope of MFRs 141 Agriculture held by
lessee.
iii. Service concession arrangements.

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iv. Licenses of intellectual property granted by lessor within the scope of MFRs
15 Revenue from Contract with Customers.

v. Rights held by lessee under licensing agreements within the scope of MFRs
138 Intangible Assets for such items as motion picture films, video
recordings, plays, manuscripts, patents and copyrights.

MFRs 16 Exemption
Lessee may elect not to apply the requirements in paragraph 22 – 49 from this

standard if:

The contract is a short-term leases.

The underlying asset is a low value asset.

However, lessee shall recognise the lease payments associated with those leases as
an expense on either a straight-line basis over the lease term or another simple systematic
basis.

Identifying the Leasing Underlying Asset
There are FOUR aspect to be tested when to ensure whether the underlying asset is

subject to the lease contract:

Written agreement between lessor giving the underlying asset to lessee
for a period.

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Lessor has no substantive rights to substitute the underlying asset
throughout the period of use

Lessee has the right to control the use of the underlying asset.

Lessor must receive a contribution such as rental payment throughout
the period.

EXAMPLE 1 - Lessor substantive rights to substitute the underlying asset
Lessee enter a contract with lessor a shopping complex owner to rent a space on the
second floor of the complex to sell the goods for three years. The contract states the
amount of space (10 feet by 12 feet) can be located at any areas within the second
level. Lessor has the right to move the allocation space to any available area that meet
the requirement.

ANSWER :
NO LEASE CONTRACT – lessor still have the rights to use the asset
throughout the contract period.

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EXAMPLE 2 - Lessor substitute rights not to substantive the underlying asset

Lessee enter a contract with lessor a shopping complex owner to rent a specific space
on the second floor of the complex to sell the goods for three years. The contract
states specifically if the space require repairs and maintenance, the cost will be bare
by lessor. If the space is beyond repair, lessor shall provide a new space that
equivalent to the current space. The terms of three years rental is not cancellable by
lessee.

ANSWER :
LEASE CONTRACT – lessor substitute rights when needed only and has
no rights of the asset use.

Lessee Accounting Model

MFRs 16 stated that lessee should recognised the “Right-to-Use” (RoU) asset and the
lease liability at the commencement date. Finance and operating lease were no longer
applicable in lessee accounting. However this finance and operating lease were still
applicable in lessor accounting (refer MFRs 117).

Right-to-Use (RoU) Asset
At the commencement date, lessee should measure the RoU asset at cost (MFRs 16

para 23). The cost of the RoU asset should comprise:
i. The amount of the initial measurement of the lease liability.
ii. Any lease incentives received shall be deducted from the lease payment
made at or before the commencement date.
iii. Any initial direct costs incurred by lessee.

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iv. An estimate of costs to be incurred by lessee in dismantling and removing
the underlying asset, restoring the site or the underlying asset condition as
stated in agreement.

FORMULA – RIGHT-OF-USE ASSET (RoU) :
RoU = NPV of Lease Liability + Initial Direct Cost - Cost Received from Lessor

Lease Liability and Lease Payment
At the commencement date, lessee should measure the lease liability at the present

value (PV) of the lease payments that are not paid on that date. The lease payment should
be discounted using implicit interest or increment borrowing rate if the implicit rate cannot
be determined.

FORMULA – LEASE LIABILITY :
Total Lease Liability = PV of Unpaid Total Lease Payment

The lease payment should contain the following payments that are not paid at the
commencement date:

Variable lease payments.

Fixed payment less any lease incentives receivable.

Purchase option price.
Amounts expected to be payable by lessee under residual value

guarantees.

Payments of penalties for terminating the lease.

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Lease payment or also known as a rental payment can either paid by lessee at the
beginning of accounting period or at the end of the accounting period. Payment made in the
beginning of accounting period is known as advance payment (refer example 4)and payment
made at the end of the accounting period is known as areas payment (refer example 3).
Amount payment and numbers of payment to be made depends on the contract terms.

FORMULA – ARREARS LEASE PAYMENT :

Total Lease Payment = Lease Payment x PVIFA(n, %)

@

Total Lease Payment = ∑ + + + …. +
( + ) ( + ) + ( + ) + ( + )

* LP = Lease Payment
n = number of years until current year
i = interest
t = total years

EXAMPLE 3 – Calculating Right-of-Use Asset and Lease Liability using
Arrears Lease Payment

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FORMULA – ADVANCE LEASE PAYMENT :

Total Lease Payment = Lease Payment x PVIFA(n-1, %)

@

Total Lease Payment = ∑ − + + + …. +
( + ) − ( + ) − ( + )

* LP = Lease Payment
n = number of years until current year
i = interest
t = total years

EXAMPLE 4 – Calculating Right-of-Use Asset and Lease Liability using
Advanced Lease Payment

Lessee – Single Asset Lease

The underlying assets need to be accounted individually if the asset has different
criteria in the lease contract. For example, a lease contract of three units of photocopier
machines for 5 years with an annual payment of RM 4,000. Since the contract for each of the

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assets is the same, this contract can be treated in lessee accounting model as a single contract
even though the asset is more than one.
EXAMPLE 5 – Calculating the Arrears Lease Payment on Single Asset

EXAMPLE 6 – Calculating the Advanced Lease Payment on Single Asset

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Presentation and Disclosure in Lessee

MFRs 16 stated that information regarding lease will have to be presented in
Statement of Financial Position, Statement of Comprehensive Income and Statement of Cash
Flow. Lessee shall present the information either in the Statement of Financial Position or
the notes to the Financial Statements. Lessee may present Right-of-Use Asset as non-current
asset but must be separately from other non-current asset items. Lease liability recognise in
Non-Current Liability.

FORMAT – PRESENTING LEASES IN STATEMENT OF FINANCIAL POSITION

EXAMPLE 7 – Presenting the Advanced & Arrears Lease Payment

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Tutorial Questions MFRs 16

Question 1

Below is the lease arrangement between Hatsune Bhd. and Gatcha Bhd. which was executed on
1st January 2019:

a) Hatsune is to lease the photocopier machine from Gatcha Bhd.
b) The lease term is for three years and non-cancellable.
c) Hatsune Bhd. is to make an annual lease payment of RM 30,000 at the beginning of

accounting period. The first payment has been made on 1st January 2019.
d) At the end of the lease term, Hatsune Bhd. is required to return the machine to

Gatcha Bhd.
e) The machine has a fair value of RM 100,000 and an estimated economic life of 5

years.
f) The implicit interest rate is 10%.

As a lessee, you are required to:
(i) Calculate the Rights-of-Used Asset and Total Lease Liability.
(ii) Prepare a lease payment schedule for three years.
(iii) Prepare a depreciation schedule for three years.
(iv) Provide the journal entries for all the transactions occurred for three years from the date
of lease contract executed.
(v) Show the extract Statement of Comprehensive Income for the year ended 2019 until
2021.
(vi) Show the extract Statement of Financial Position for the year 2019 until 2021.

Question 2

On 1st of January 2019, Crissy Bhd. enters a lease contract for a factory machinery that has a fair
value of RM 160,000. The lease contract is for 3 years with no option to extend. The machinery
will be returned to the lessor by the end of lease term. The present value of unpaid lease
payment at the end of commencement date was RM 152,000 with 10% implicit interest rate. The
useful life of this factory machinery is estimated to be 4 years with no residual value.

As a lessee, you are required to:
(i) Determine the amount of lease payment to be made annually.
(ii) Determine type of lease payment either it is an advanced payment or an arrears
payment.

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(iii) Calculate Total Rights-of-Used Asset and Total Lease Liability on the commencement
date.

(iv) Prepare the lease payment and depreciation schedule for whole lease term.
(v) Provide the journal entries from date of commencement until end of lease term.
(vi) Show the extract Statement of Comprehensive Income for the year ended 2019 until

2021.
(vii) Show the extract Statement of Financial Position for the year 2019 until 2021.

Question 3

Rainbow Dash Bhd. enters a lease contract with Pinky Pie Bhd. on 1 January 2019 for an
equipment costing RM 110,000. The lease agreement requires payment of five annual rents of
RM 25,000 each, payable in arrears at the end of the respective years. The equipment needs to
be returned to Pinky Pie Bhd. at the end of lease term. The lease contract is not cancellable. The
annual rents are included RM 5,000 for maintenance service which was supposed to be paid by
Pinky Pie Bhd. The equipment is estimated to have a useful life of 8 years with no residual value.
The implicit interest rate is 10% per annum

As a lessee, you are required to:
(i) Determine the amount that should be recorded as equipment Rights-of-Used and total
lease liability.
(ii) Prepare the lease payment and depreciation schedule for whole lease term.
(iii) Provide the journal entries from date of commencement until end of lease term.
(iv) Show the extract Statement of Comprehensive Income for the year ended 2019 until end
of lease term.
(v) Show the extract Statement of Financial Position for the year 2019 until end of lease term.

Question 4

Diya Bhd. leased an equipment to Tathek Bhd. for 5 years on 1st of January 2019. The agreement
is a non-cancellable. The equipment has an estimated life of 6 years and a fair value of RM
1,800,000 at the commencement of the lease. The following is the lease term:

(a) Rental payments of RM 200,000 payable at the beginning of each 6-month period
throughout the lease period.

(b) The actual residual value is estimated to be RM 60,000. The depreciation used a
straight-line method

(c) The incremental borrowing rate is 8% per annum.

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As a lessee, you are required to:
(i) Determine the amount that should be recorded as equipment Rights-of-Used and total
lease liability.
(ii) Prepare the lease payment and depreciation schedule for whole lease term.
(iii) Provide the journal entries from date of commencement until end of lease term.
(iv) Show the extract Statement of Comprehensive Income for the year ended 2019 until end
of lease term.
(v) Show the extract Statement of Financial Position for the year 2019 until end of lease term.

Question 5

A lessee enters into an agreement to lease a land rover to cultivating the farm from its owners
with a lease term for 5 years. The commencement date is on the 1st January 2019. The lease
payment was paid twice annually with the amount of RM 500,000 for each payment until the end
of lease term. The first payment has been made on the commencement date. Initial direct costs
amount RM 10,000. The entity’s current borrowing is 6% per annum.

As a lessee, you are required to:
(i) Determine the amount that should be recorded as equipment Rights-of-Used and total
lease liability.
(ii) Prepare the lease payment and depreciation schedule for whole lease term.
(iii) Provide the journal entries from date of commencement until end of lease term.
(iv) Show the extract Statement of Comprehensive Income for the year ended 2019 until end
of lease term.
(v) Show the extract Statement of Financial Position for the year 2019 until end of lease term.

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MFRS 123

BORROWING COST

Introduction to Borrowing Cost LEARNING OBJECTIVES:

Small businesses and others normally take By the end of this topic, student should be
out commercial bank loans with the hope of using able to:
borrowed capital to become more profitable by
purchase real estate and expand operation, to 1. Describe the definition on borrowing
purchases equipment or inventory and can cost and qualifying of asset in
increase working capital. Loans can come from accordance with MFRs 123.
sources other than banks, such as credit unions,
public funds, or private investors (Rosemary 2. Determine the initial measurement
Carlson). for commencement, suspension, and
cessation of capitalization.
The businesses must alert borrowing cost
interest and other charges that must be paid when 3. Calculate the amount of borrowing
borrowing money from outsources (Cambridge cost that eligible to be capitalize.
Dictionary). In other words, Interest and other
cost that incurred during the fund was taken as a 4. Summarize the presentation and
loan must be consider as part of the borrowing disclosure required for borrowing cost
costs. in the extract of Financial Reporting.

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Overview of the MFRs 123

MFRs 123 has defined the borrowing costs as an interest and other costs that an entity
incurs in connection with obtaining loan. The borrowing cost may include:

Interest expense calculated using the effective interest
method as described in MFRs 9.

Interest in respect of lease liabilities recognised in
accordance with MFRs 16 Leases.

Exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an
adjustment to interest costs.

Qualifying Assets
A qualifying asset is an asset that necessarily takes a substantial period of time to get

ready for its intended use or sale. Depending on the circumstances, any of the following may
be qualifying assets:

Inventories that take a Considerable Period of Time.

Manufacturing Plants.

Power Generation Facilities.

Intangible Assets.

Investment Properties.

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Qualifying assets are not included financial assets and inventories that are
manufactured over a short period of time. When acquired assets that are ready for their
intended use or sale are also not qualifying assets. An entity shall capitalise borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying
asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an
expense in the period in which it incurs them.

The borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are those borrowing costs that would have been avoided if
the expenditure on the qualifying asset had not been made. When an entity borrows funds
specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that
directly relate to that qualifying asset can be readily identified.

EXAMPLE 1a –The Qualifying Asset

A power plant which will take a substantial period to get ready to
generate electricity.

A hydroelectric dam that serves the needs of a town and can take
several years of construct.

A toll bridge which takes a couple of years to construct before can be
opened for public use.

EXAMPLE 1b –Not a Qualifying Asset

Other investment.

Inventories that are routinely manufactured or otherwise produced in a
large quantity on competitive basis over a short period.

Asset that are ready for their intended use or sale when acquired.

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EXAMPLE 2 – Borrowing Cost

Types of Borrowing Cost

Borrowing activities can happen specifically for specific assets and also generally
borrow from different sources then uses them for qualifying assets.

Specific Borrowing Cost
MFRs 123 para 12 has stated that an entity borrows funds specifically for the purpose

of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs
eligible for capitalisation as the actual borrowing costs incurred on that borrowing during
the period less any investment income on the temporary investment of those borrowings.

In other words, the loan or the borrowing cost is used 100% or mainly for obtaining
the qualifying asset. The specific amount to be capitalize were shown as below :

FORMULA – Borrowing Cost Eligible to Capitalize:

Actual Interest on Borrowing Cost Incurred during RM
the Period XX

less: Any Investment Income on Temporary Investment (XX)
from the Borrowing
XYZ

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EXAMPLE 3 – Specific Borrowing Cost

General Borrowing Cost
MFRs 123 para 14 has stated that the entity that borrowed funds generally and uses

them for the purpose of obtaining a qualifying asset, the entity shall determine the amount
of borrowing costs eligible for capitalisation by applying a capitalisation rate to the
expenditures on that asset. The capitalisation rate shall be the weighted average of the
borrowing costs applicable to the borrowings of the entity that are outstanding during the
period, other than borrowings made specifically for the purpose of obtaining a qualifying
asset. The amount of borrowing costs that an entity capitalises during a period shall not
exceed the amount of borrowing costs it incurred during that period.

FORMULA – Borrowing Cost to be Capitalize:

Amount spent from General Borrowing RM
X Weighted Average Interest XX

TOTAL INTEREST TO BE CAPITALISED i

XYZ

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FORMULA – Calculating the Weighted Average Interest:

Loan 1 @ 12% per annum Total Loan Total Interest
Loan 2 @ 10% per annum RM RM
Loan 3 @ 8% per annum XX Ii
XX Ii
TOTAL XX ii

XXX iii

WEIGHTED AVERAGE INTEREST = ∑ Total Loan / ∑ Total Interest

EXAMPLE 4 – General Borrowing Cost

Commencement of Capitalisation

On the commencement date, an entity shall begin capitalising borrowing costs as part
of the cost of qualifying asset. The commencement date for capitalisation is the date when
the entity first meets all of the following conditions:

Activities that are necessary to prepare the asset for its
intended use or sales.

Expenditures for the asset are being inccured.
Borrowing costs are being inccured.

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EXAMPLE 5 – Commencement of Borrowing Cost

Suspension of Capitalisation

An entity shall suspend capitalisation of borrowing costs during extended periods in
which it suspends active development of a qualifying asset. An entity may incur borrowing
costs during an extended period in which it suspends the activities necessary to prepare an
asset for its intended use or sale. Such costs are costs of holding partially completed assets
and do not qualify for capitalisation.

However, an entity does not normally suspend capitalising borrowing costs during a
period when it carries out substantial technical and administrative work. An entity also does
not suspend capitalising borrowing costs when a temporary delay is a necessary part of the
process of getting an asset ready for its intended use or sale. For example, capitalisation
continues during the extended period that high water levels delay construction of a bridge, if
such high water levels are common during the construction period in the geographical region
involved.

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EXAMPLE 6 – Suspension of Borrowing Cost

Cessation of Capitalisation

An entity shall cease capitalising borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete. 23 An
asset is normally ready for its intended use or sale when the physical construction of the asset
is complete even though routine administrative work might still continue. If minor
modifications, such as the decoration of a property to the purchaser’s or user’s specification,
are all that are outstanding, this indicates that substantially all the activities are complete.

When an entity completes the construction of a qualifying asset in parts and each part
is capable of being used while construction continues on other parts, the entity shall cease
capitalising borrowing costs when it completes substantially all the activities necessary to
prepare that part for its intended use or sale.

EXAMPLE 7 – Cessation of Borrowing Cost

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Tutorial Questions MFRs 123

Question 1
Construction of Hanna’s new store began on 1st April 2019. The costs were incurred on
the construction immediately. The store was completed on 1 January 2020 and brought
into use following its grand opening on the 1 April 2020. Hanna issued a RM2,500,000
unsecured loan on 1 April 2019 to aid construction of the new store (which meets the
definition of a qualifying asset). The loan carried an interest rate of 8% per annum.

You are required to:
(i) Calculate the borrowing cost capitalized.
(ii) Summarize the presentation and disclosure required in the extract of Financial
Statements for Borrowing Cost.

Question 2
1st January 2019 Appala Bhd. borrowed RM 1,000,000 loan from bank with an interest
rate of 10% to finance the construction of power generation facilities of the company.
The loan was utilized on qualifying asset starting from April 2019.

In January 2019, the company deposited in a bank yielding interest at 6% per annum.
The whole amount was withdrawn and paid to contractor on 31 December 2019 when
the construction was completed and ready for use.

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You are required to :
(i) Calculate the net borrowing cost that should be capitalized as part of the cost of
the new store and the finance cost that should be reported in the income
statement for the year ended 31st Dec 2019.
(ii) Show the extracts from income statement for the year ended 31st Dec 2020 and
Statement of financial position as at 31st Dec 2019.

Question 3

Alabama Bhd. obtained RM10 million loan with an interest rate of 12% which was equal
to its effective interest rate on 1 April 2019. The loan was specifically issued to finance
the building of the new store which meets the definition of a qualifying asset.
Construction of the store commenced on 1 May 2019, and it was completed and ready
for use on 28 February 2020 but did not open for trading until 1 April 2020. To complete
the construction company had incurred RM12 million.

During the year trading at Alabama’s other stores was below expectations so Alabama
suspended the construction of the new store for a two-month period during July and
August 2019. The proceeds of the loan were temporarily invested for the month of April
2019 and earned interest of RM50,000.

You are required to :
(i) Calculate the net borrowing cost that should be capitalized as part of the cost of
the new store and the finance cost that should be reported in the income
statement for the year ended 31st March 2020.
(ii) Show the extracts from income statement for the year ended 31st March 2020
and Statement of financial position as at 31st March 2020.

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Question 4

Unity Bhd. get the contract to build a unify smart cable that will ease wireless network in

the city. The cost of the project was estimated to be RM 950 million and is to be

completed in 2 years. On 1st January 2020, the company borrowed from various sources

for the construction and working capital are as follows:

Sources Interest Rate (%) Amount (RM’000)

Corporate Bonds 10 300

Bank Loan 8 400

Institutional Borrowing 9 300

Additional Information :
During the year, the company only utilized 80% of the allocated funds and invested the
remaining amount. The investment earned an income of RM 10 million.

You are required to :
(i) Identify the capitalization rate.
(ii) Calculate the net borrowing cost that should be capitalized as part of the cost of
the new store and the finance cost that should be reported in the income
statement for the year ended 31st December 2020.
(iii) Show the extracts from income statement for the year ended 31st December 2020
and Statement of financial position as at 31st December 2020.

26 eBook PSP [FINANCIAL ACCOUNTING – Leasing and Borrowing Cost]

Question 5

Aliana Holdings a property development company, has the following loans in place at the

beginning of the year 2020. On 1st January 2020, Aliana Holdings began a project

construct a condominium in Bandar Baharu Kulim. For the year 2020, the project utilized

the total of RM 120,000,000 from the existing borrowing which was taken twice – RM

70,000,000 on 1st January 2020 and RM 50,000,000 on 2nd July 2020:

Sources Interest Rate (%) Amount (RM’000)

Foreign Currency Loan 6 100,000

Bank Loan 10 50,000

You are required to Calculate the borrowing cost that can be capitalized for the condominium
project in year 2020.

Lazar, J. (2018). Company & Group Financial Reporting (9th ed.). Kuala Lumpur, Malaysia:
Pearson Malaysia Sdn. Bhd.

Malaysian Financial Reporting Standard (MFRS) (2020). MFRs 16 Leases. Retrieved from
Malaysian Accounting Standard Board: www.masb.org

Malaysian Financial Reporting Standard (MFRS) (2012). MFRs 123 Borrowing Cost.
Retrieved from Malaysian Accounting Standard Board: www.masb.org

Mohamad Ariff, A., Alfan, E., Abdullah, M., Sapiei, N., Puat Nelson, S., & Rosli, M. (2019).
Financial Accounting and Reporting 2 (2nd ed.). (S. S., & N. Mahzan, Eds.) Shah
Alam, Selangor, Malaysia: Oxford Fajar Sdn. Bhd

Tan, L. T. (2019). Financial Accounting and Reporting in Malaysia (7th ed.). Kuala Lumpur,
Malaysia: Commerce Clearing House (Malaysia) Sdn. Bhd

POLITEKNIK SEBERANG PERAI
JALAN PERMATANG PAUH
13500 PERMATANG PAUH
PULAU PINANG
http://www.psp.edu.my