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CMA Final · Corporate Financial Reporting · Leases (Ind AS 116)

Kaveri Textiles leases a machine for 3 years, paying Rs 1,00,000 at the end of each year. The rate implicit in the lease cannot be readily determined, so the incremental borrowing rate of 10% p.a. is used. The present value of an annuity of Re 1 for 3 years at 10% is 2.486852. Kaveri pays Rs 10,000 of initial direct costs. There are no lease incentives, prepaid payments or restoration obligations. At what amount is the right-of-use asset initially recognised?

The right-of-use asset is Rs 2,58,685. It equals the present value of the lease payments, Rs 2,48,685 at 10%, plus the Rs 10,000 initial direct costs. Payments are discounted, not taken at the undiscounted Rs 3,00,000, and the direct costs are added, not deducted.

  1. ARs 2,48,685
  2. BRs 2,58,685Correct
  3. CRs 3,10,000
  4. DRs 2,38,685

Explanation

Lease liability = 1,00,000 x 2.486852 = Rs 2,48,685. The right-of-use asset is the lease liability plus initial direct costs: 2,48,685 + 10,000 = Rs 2,58,685. Rs 2,48,685 omits the initial direct costs. Rs 3,10,000 uses undiscounted payments. Rs 2,38,685 subtracts the costs instead of adding them.

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