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CA Intermediate · Advanced Accounting · AS 19 Leases

Bharat Textiles Ltd. acquired a loom under a finance lease. The fair value of the loom at inception is ₹10,00,000 and the present value of the minimum lease payments, at the interest rate implicit in the lease, is ₹9,40,000. The lessee paid ₹10,000 as initial direct costs to arrange the lease. At what amount should the loom be recognised as an asset in the lessee's books?

The loom is recognised at ₹9,50,000. AS 19 requires a finance lease asset to be recorded at the lower of fair value and present value of minimum lease payments, here ₹9,40,000, and the lessee's initial direct costs of ₹10,000 are added to it.

  1. A₹9,50,000Correct
  2. B₹9,40,000
  3. C₹10,10,000
  4. D₹10,00,000

Explanation

The lessee records the asset at the lower of fair value (10,00,000) and present value of minimum lease payments (9,40,000), i.e. ₹9,40,000. Initial direct costs of the lessee are added to this amount: 9,40,000 + 10,000 = ₹9,50,000. Option ₹10,10,000 wrongly starts from the higher fair value.

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