Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Godavari Finance Ltd. leases equipment to Anand Mills Ltd. under a finance lease for 3 years. The annual lease rental is ₹4,00,000, payable at each year end. Anand Mills has guaranteed a residual value of ₹1,00,000 at the end of the lease, and the lessor estimates a further unguaranteed residual value of ₹50,000. The present value of the gross investment at the interest rate implicit in the lease equals the fair value of the equipment, ₹11,00,000. What is the unearned finance income of Godavari Finance?

The unearned finance income is ₹2,50,000. Gross investment is lease rentals of ₹12,00,000 plus guaranteed residual ₹1,00,000 plus unguaranteed residual ₹50,000, totalling ₹13,50,000. Subtracting the present value of ₹11,00,000 gives the unearned finance income.

  1. A₹1,00,000
  2. B₹2,00,000
  3. C₹2,50,000Correct
  4. D₹13,50,000

Explanation

Gross investment = minimum lease payments (3 × 4,00,000 + 1,00,000 guaranteed residual = 13,00,000) plus the unguaranteed residual value 50,000 = 13,50,000. Unearned finance income = gross investment − present value of gross investment = 13,50,000 − 11,00,000 = 2,50,000. Leaving out the unguaranteed residual gives 2,00,000, which is wrong.

Did you get it right without looking?

One question tells you little. A timed set on AS 19 Leases shows your real accuracy, how long you take and where you lose marks.

Practise AS 19 LeasesFree diagnostic mock

More AS 19 Leases questions