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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 inception is Rs 10,00,000. The present value of minimum lease payments, discounted at the lessee's incremental borrowing rate (the implicit rate is not practicable to determine), is Rs 9,50,000. Kaveri Logistics also incurs Rs 20,000 of initial direct costs directly attributable to the lease. At what amount should the truck be recognised as an asset in Kaveri Logistics' books?

Rs 9,70,000. The lessee recognises a finance-leased asset at the lower of fair value (Rs 10,00,000) and the present value of minimum lease payments (Rs 9,50,000). Initial direct costs of Rs 20,000 are then added, giving Rs 9,70,000.

  1. ARs 9,50,000
  2. BRs 9,70,000Correct
  3. CRs 10,00,000
  4. DRs 10,20,000

Explanation

The lessee records a finance lease asset at the lower of fair value and the present value of minimum lease payments, which is Rs 9,50,000. Initial direct costs incurred by the lessee are added to the amount recognised as an asset, giving 9,50,000 + 20,000 = Rs 9,70,000. Rs 10,20,000 is wrong because it starts from the higher fair value instead of the lower amount.

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