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CA Intermediate · Advanced Accounting · AS 19 Leases

Ganga Equipments Ltd. leases out a crane under a 4-year non-cancellable operating lease. The crane costs ₹10,00,000 and is depreciated at ₹1,00,000 per year, consistent with the lessor's policy for similar assets. The lessee pays no rent in year 1 and ₹1,20,000 per year for years 2 to 4. Time pattern of the lessee's benefit is not shown to be different from straight-line. What is the net income Ganga should report from this lease for year 1 after charging depreciation?

The net result for year 1 is a loss of ₹10,000. Total rent of ₹3,60,000 is spread straight-line over four years, giving ₹90,000 income each year even though no cash is received in year 1. Depreciation of ₹1,00,000 is then deducted.

  1. A−₹10,000Correct
  2. B−₹1,00,000
  3. C₹20,000
  4. D₹80,000

Explanation

Lease income from an operating lease is recognised on a straight-line basis over the lease term unless another systematic basis is more representative. Total rent = 3 × 1,20,000 = ₹3,60,000; per year = ₹90,000. Depreciation is ₹1,00,000, so net = 90,000 − 1,00,000 = −₹10,000. Recognising nil rent in year 1 would give −₹1,00,000, which is wrong.

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