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CA Intermediate · Advanced Accounting · AS 19 Leases

Ganga Constructions Ltd. (lessor) leased equipment on 1 April 2025 under a finance lease. Annual lease rentals are Rs 2,00,000 payable at year end for 3 years. Unguaranteed residual value is Rs 50,000. Gross investment is Rs 6,50,000 and unearned finance income is Rs 1,00,000. After the first rental is received at year end, the implicit rate applied gives finance income of Rs 45,000 for year 1. What is the net investment in the lease at the start, and the net investment at the end of year 1 after receiving the rental?

Net investment at the start is gross investment of Rs 6,50,000 less unearned finance income of Rs 1,00,000, giving Rs 5,50,000. After adding year-one finance income of Rs 45,000 and deducting the Rs 2,00,000 rental received, the net investment is Rs 3,95,000.

  1. AStart Rs 5,50,000; end Rs 3,95,000Correct
  2. BStart Rs 6,50,000; end Rs 4,50,000
  3. CStart Rs 5,50,000; end Rs 3,50,000
  4. DStart Rs 5,50,000; end Rs 4,05,000

Explanation

Net investment = gross investment less unearned finance income = 6,50,000 - 1,00,000 = Rs 5,50,000. At year end: 5,50,000 + finance income 45,000 - rental 2,00,000 = Rs 3,95,000. Ignoring finance income gives 3,50,000; adding the rental gives wrong values.

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