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CA Intermediate · Advanced Accounting · AS 19 Leases

Kaveri Textiles Ltd. enters into a finance lease for a machine. At inception, the fair value of the machine is ₹12,00,000 and the present value of the minimum lease payments (at the interest rate implicit in the lease) is ₹11,40,000. Kaveri also pays ₹20,000 as legal and negotiation costs directly attributable to arranging the lease. At what amount should Kaveri recognise the asset and the corresponding liability on initial recognition?

The liability is ₹11,40,000 and the asset is ₹11,60,000. The lessee takes the lower of fair value and present value of minimum lease payments, which is ₹11,40,000. Initial direct costs of ₹20,000 are added to the asset but not to the liability.

  1. AAsset ₹12,20,000 and liability ₹12,00,000
  2. BAsset ₹11,60,000 and liability ₹11,40,000Correct
  3. CAsset ₹11,60,000 and liability ₹11,60,000
  4. DAsset ₹12,00,000 and liability ₹12,00,000

Explanation

The lessee records the lower of fair value (₹12,00,000) and present value of minimum lease payments (₹11,40,000), which is ₹11,40,000. The liability is recorded at this amount. Initial direct costs of ₹20,000 are added to the amount recognised as an asset only, giving ₹11,60,000. The option with asset ₹12,20,000 wrongly starts from fair value.

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