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CA Intermediate · Advanced Accounting · AS 19 Leases

Kaveri Engineering Ltd. entered into a finance lease for a machine. The fair value of the machine at the inception of the lease is ₹10,00,000, and the present value of the minimum lease payments (at the interest rate implicit in the lease) is ₹9,60,000. Kaveri paid ₹15,000 as legal and negotiation costs directly attributable to arranging the lease. At what amount should Kaveri recognise the asset and the corresponding liability at inception?

The liability is recognised at ₹9,60,000, the lower of fair value and present value of minimum lease payments. The asset is ₹9,75,000 because the lessee's initial direct costs of ₹15,000 are added to the asset value but do not form part of the liability.

  1. AAsset ₹9,75,000 and liability ₹9,60,000Correct
  2. BAsset ₹9,60,000 and liability ₹9,60,000
  3. CAsset ₹10,15,000 and liability ₹10,00,000
  4. DAsset ₹10,00,000 and liability ₹10,00,000

Explanation

The lessee recognises the lease at the lower of fair value (₹10,00,000) and present value of minimum lease payments (₹9,60,000), i.e. ₹9,60,000, and this is the liability. Initial direct costs of ₹15,000 are included in the amount recognised as an asset, so the asset is ₹9,75,000. Recording both at ₹9,60,000 ignores the direct costs.

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