CMA Intermediate · Financial Accounting · Lease Accounting
Kaveri Finance Ltd. has a net investment of Rs 5,00,000 in a finance lease at an implicit rate of 12% per annum. The annual receipt at the end of year 1 is Rs 1,60,000, which includes Rs 10,000 as reimbursement for maintenance services provided by the lessor. What is the net investment outstanding after the year 1 receipt?
The net investment outstanding is Rs 4,10,000. Finance income is Rs 60,000 (12% of Rs 5,00,000). Only the Rs 1,50,000 payment excluding the service charge is applied against the lease, so the principal reduces by Rs 90,000 from Rs 5,00,000.
- ARs 4,10,000Correct
- BRs 4,00,000
- CRs 3,50,000
- DRs 5,60,000
Explanation
Finance income = 12% of 5,00,000 = 60,000. Lease payment excluding service costs = 1,60,000 - 10,000 = 1,50,000. Under AS 19 this is reduced from principal and unearned finance income, so the principal falls by 1,50,000 - 60,000 = 90,000 and the closing net investment is 4,10,000. Rs 4,00,000 wrongly deducts the service element too.
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