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CA Intermediate · Advanced Accounting · AS 19 Leases

Arvind Textiles Ltd. takes a machine on an operating lease for 3 years. The lease rentals are Rs 2,00,000 in year 1, Rs 3,00,000 in year 2 and Rs 4,00,000 in year 3. The increases are fixed by the agreement and are not linked to inflation or to the lessor's cost increases. No other basis is more representative of the benefit pattern. What lease rent expense should Arvind Textiles charge to profit and loss in year 1?

The year 1 expense is Rs 3,00,000. AS 19 requires operating lease rentals to be charged on a straight-line basis over the lease term. Total rentals of Rs 9,00,000 spread over three years give Rs 3,00,000 each year, regardless of the actual cash paid in that year.

  1. ARs 2,00,000, being the rental actually paid in year 1
  2. BRs 3,00,000, being the straight-line chargeCorrect
  3. CRs 4,00,000, being the final-year rental
  4. DRs 9,00,000, being the entire rental charged in year 1

Explanation

Under AS 19, operating lease payments are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the user's benefit. Total rentals are 2+3+4 = Rs 9,00,000, so the yearly charge is Rs 3,00,000. Charging the amount actually paid (Rs 2,00,000) ignores the straight-line requirement.

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