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CA Intermediate · Advanced Accounting · AS 19 Leases

Kaveri Traders Ltd. took a showroom on an operating lease for 3 years from 1 April 2025. The agreed annual rent is Rs 1,00,000 for year 1, Rs 1,20,000 for year 2 and Rs 1,40,000 for year 3. The increases are fixed in the agreement and are not linked to inflation or to the lessor's expected cost increases. No other basis is more representative of the user's benefit pattern. What rent expense should Kaveri Traders recognise in the statement of profit and loss for 2025-26?

The expense for 2025-26 is Rs 1,20,000. AS 19 requires a lessee to charge operating lease rentals on a straight-line basis over the lease term. Total rent of Rs 3,60,000 spread over three years gives Rs 1,20,000 a year, regardless of the actual cash payment in year one.

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

Explanation

Under AS 19 a lessee recognises operating lease payments on a straight-line basis over the lease term unless another systematic basis is more representative. Total rent is 1,00,000 + 1,20,000 + 1,40,000 = Rs 3,60,000, and 3,60,000 / 3 = Rs 1,20,000 per year. Using the cash payment of Rs 1,00,000 is wrong because the schedule does not drive the expense.

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