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CA Intermediate · Advanced Accounting · AS 19 Leases

Bharat Leasing Ltd. leases equipment to Tarun Mills Ltd. under a finance lease. The lease has 4 annual rentals of Rs 2,00,000 each. Tarun Mills guarantees a residual value of Rs 50,000 at the end of the lease, and Bharat expects a further unguaranteed residual value of Rs 30,000. The equipment's cost and fair value to Bharat are both Rs 7,00,000, and there are no initial direct costs. What is the unearned finance income at inception?

Unearned finance income is Rs 1,80,000. Gross investment is rentals of Rs 8,00,000 plus the guaranteed residual of Rs 50,000 plus the unguaranteed residual of Rs 30,000, which is Rs 8,80,000. Deducting the Rs 7,00,000 cost and fair value leaves Rs 1,80,000 to be recognised as income over the lease term.

  1. ARs 1,00,000
  2. BRs 1,50,000
  3. CRs 1,80,000Correct
  4. DRs 2,10,000

Explanation

Gross investment = minimum lease payments + unguaranteed residual value. Minimum lease payments from the lessor's view = rentals 8,00,000 + guaranteed residual 50,000 = 8,50,000. Adding the unguaranteed residual of 30,000 gives gross investment of Rs 8,80,000. Unearned finance income = gross investment - present value (here Rs 7,00,000) = Rs 1,80,000. Rs 1,50,000 omits the unguaranteed residual value.

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