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(14) Mr Fairul, who just graduated in accounting, is auditing the company’s financialstatement for the year ended 31 December 2018. He noticed that on 1 December2017, the company entered into a leasing contract as follows: i. The non cancellable term of 2 years. ii. Rental of RM3,240 per year (paid on every 30 November). (The present valueis RM5,778.) iii. Estimated residual value after 2 years is RM1,100. SP guarantees the residualvalue of RM1.1UU. iv. Estimated economic life of the asset is 5 years. v. The implicit rate and SP’s incremental borrowing rate is 8% per year. In the company’s accounting record, the company recorded the lease payment asrental expense. Mr Fairul asked Miss Farisha, an account clerk. why the companyrecorded as rental expense. Miss Farisha explained that. the lease contract doesnot meet the requirements to be classified as a finance lease as none of the testis met. Mr Fairul suspected that Miss Farisha referred to the old accountingstandard. Discuss the above situation. In your discussion be sure to include (a) what youdetermined about the lease, and (b) how you advised the company to account for this lease. Explain every journal entry that you believe necessary to record thislease properly including the correction for the error made.

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