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CA Intermediate · Advanced Accounting · AS 19 Leases

Kaveri Logistics Ltd. enters into a finance lease for a truck. The fair value of the truck at the inception of the lease is Rs 10,00,000. The present value of the minimum lease payments, at the lessee's incremental borrowing rate (the interest rate implicit in the lease cannot be determined), is Rs 9,40,000. Kaveri also pays Rs 20,000 as initial direct costs on negotiating and arranging the lease. At what amount should Kaveri recognise the truck as an asset at inception?

The truck is recognised at Rs 9,60,000. The lessee takes the lower of fair value (Rs 10,00,000) and the present value of minimum lease payments (Rs 9,40,000), then adds its own initial direct costs of Rs 20,000. Rs 9,40,000 plus Rs 20,000 gives Rs 9,60,000.

  1. ARs 10,00,000
  2. BRs 9,40,000
  3. CRs 10,20,000
  4. DRs 9,60,000Correct

Explanation

A lessee recognises a finance-leased asset at the lower of fair value and the present value of minimum lease payments. This is Rs 9,40,000. Initial direct costs of the lessee are added to the amount recognised as an asset, so the amount is 9,40,000 + 20,000 = Rs 9,60,000. Rs 10,20,000 wrongly adds the costs to the higher fair value.

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