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CMA Intermediate · Financial Accounting · Lease Accounting

A lessor gives an asset under a finance lease. How should the lessor show this asset in its balance sheet under AS 19 Leases?

The lessor shows the asset as a receivable equal to the net investment in the lease. Under a finance lease substantially all risks and rewards of ownership pass to the lessee, so the lessor does not carry the asset as its own fixed asset or depreciate it.

  1. AAs a receivable at an amount equal to the net investment in the leaseCorrect
  2. BAs a fixed asset at original cost less depreciation
  3. CAs inventory at the lower of cost and net realisable value
  4. DAs a receivable at the total of all future lease payments, ignoring unearned finance income

Explanation

AS 19 requires the lessor to recognise assets given under a finance lease as a receivable equal to the net investment in the lease. Substantially all risks and rewards of ownership pass to the lessee, so the lessor does not keep the asset on its books. Using the gross sum of payments would include unearned finance income, which is not yet earned.

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