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CA Intermediate · Advanced Accounting · AS 19 Leases

Bharat Logistics Ltd. took a warehouse on an operating lease for 3 years. Annual rentals are ₹1,00,000, ₹1,20,000 and ₹1,40,000 for years 1, 2 and 3, payable at each year end. The escalation is not linked to inflation or to the lessor's cost, and the straight-line basis is representative of the user's benefit. What is the rent expense for year 1 and the balance carried at the end of year 1 in the lessee's books?

The year 1 expense is ₹1,20,000 with an accrued lease rent liability of ₹20,000. Under AS 19, operating lease rentals are charged on a straight-line basis over the lease term, so total rentals of ₹3,60,000 are spread equally, and the unpaid ₹20,000 is accrued.

  1. AExpense ₹1,00,000; no balance carried
  2. BExpense ₹1,20,000; accrued lease rent liability ₹20,000Correct
  3. CExpense ₹1,20,000; prepaid rent ₹20,000
  4. DExpense ₹1,40,000; accrued lease rent liability ₹40,000

Explanation

Total rentals are ₹3,60,000, so the straight-line charge is ₹1,20,000 a year. Year 1 payment is ₹1,00,000, so ₹20,000 is an accrued liability. Charging the amount actually paid (₹1,00,000) ignores the straight-line requirement.

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