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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 minimum lease payments, discounted at the interest rate implicit in the lease, is Rs 9,50,000. Kaveri also pays Rs 20,000 as legal and negotiation costs directly attributable to arranging the lease. At what amount should Kaveri initially recognise the truck as an asset?

The truck is recognised at Rs 9,70,000. Under AS 19 the lessee takes the lower of fair value and present value of minimum lease payments, which is Rs 9,50,000, and adds its initial direct costs of Rs 20,000 to the amount recognised as the asset.

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

Explanation

The lessee recognises the asset at the lower of fair value (Rs 10,00,000) and the present value of minimum lease payments (Rs 9,50,000), i.e. Rs 9,50,000. Initial direct costs of the lessee are added to the amount recognised as an asset: 9,50,000 + 20,000 = Rs 9,70,000. Using fair value plus costs gives Rs 10,20,000, which ignores the 'lower of' rule.

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