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CA Intermediate · Advanced Accounting · AS 19 Leases

Lakshmi Leasing Ltd buys equipment for ₹36,00,000 with a useful life of 12 years and nil residual value, and leases it to Bharat Foods on a 3-year operating lease. The rentals are ₹4,00,000 in year 1, ₹5,00,000 in year 2 and ₹6,00,000 in year 3. Straight-line recognition is more representative of the time pattern of the user's benefit, and the lessor depreciates on a straight-line basis consistent with its normal policy for similar assets. Ignoring initial direct costs, what is the lessor's net income from this lease (lease income less depreciation) for year 1?

The lessor's net income for year 1 is ₹2,00,000. Operating lease income is recognised straight-line at ₹5,00,000 a year (₹15,00,000 over 3 years), and depreciation is charged over the 12-year useful life at ₹3,00,000. The difference of ₹2,00,000 is the net income.

  1. A₹1,00,000
  2. B₹2,00,000Correct
  3. C₹5,00,000
  4. DLoss of ₹7,00,000

Explanation

The lessor recognises lease income on a straight-line basis: (4,00,000 + 5,00,000 + 6,00,000) / 3 = 5,00,000 per year. Depreciation follows the asset's useful life of 12 years: 36,00,000 / 12 = 3,00,000. Net income = 5,00,000 − 3,00,000 = 2,00,000. The 1,00,000 option uses rent actually due (4,00,000) instead of the straight-line figure. The loss option depreciates over the 3-year lease term instead of the asset's life.

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