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CA Intermediate · Advanced Accounting · AS 19 Leases

Kiran Pharma Ltd enters into a finance lease for a packaging machine. At inception, the fair value of the machine is ₹10,00,000 and the present value of the minimum lease payments, using the lessee's incremental borrowing rate (the implicit rate is not practicable to determine), is ₹9,50,000. Kiran Pharma pays ₹20,000 as legal and negotiation costs directly attributable to arranging the lease. At what amount should Kiran Pharma recognise the leased asset at the inception of the lease?

The leased asset should be recognised at ₹9,70,000. AS 19 requires the lessee to take the lower of fair value (₹10,00,000) and present value of minimum lease payments (₹9,50,000), then add initial direct costs of ₹20,000 to that lower figure.

  1. A₹9,50,000
  2. B₹9,70,000Correct
  3. C₹10,00,000
  4. D₹10,20,000

Explanation

The lessee recognises the asset at the lower of fair value (10,00,000) and the present value of minimum lease payments (9,50,000), which is 9,50,000. Initial direct costs of 20,000 are included in the amount recognised as an asset, so the total is 9,70,000. Choosing 10,20,000 wrongly adds the costs to fair value, which is not the lower figure.

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