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CMA Intermediate · Financial Accounting · Lease Accounting

At the inception of a finance lease, Kaveri Foods Ltd (lessee) determines that the present value of the minimum lease payments is ₹9,50,000, while the fair value of the asset is ₹10,00,000. Taking the lower of the two as the amount to recognise, and ignoring initial direct costs, which entry is correct at inception?

The correct entry debits the leased asset and credits the lessor for ₹9,50,000 each. At inception the asset and the liability are recognised at the same amount, and here the lower of present value (₹9,50,000) and fair value (₹10,00,000) is used.

  1. ADr Leased Asset ₹10,00,000; Cr Lessor ₹9,50,000; Cr Profit and Loss ₹50,000
  2. BDr Leased Asset ₹9,50,000; Cr Lessor ₹9,50,000Correct
  3. CDr Leased Asset ₹10,00,000; Cr Lessor ₹10,00,000
  4. DDr Leased Asset ₹9,50,000; Cr Lessor ₹10,00,000; Dr Deferred Charge ₹50,000

Explanation

The asset and the liability for future lease payments are recognised at the same amount at inception. The lower figure is the present value of ₹9,50,000, so both sides are ₹9,50,000. Recording at fair value of ₹10,00,000 uses the higher figure and is wrong.

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