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

Lessee Mehta Foods Ltd. begins a 4-year lease of a cold-storage unit with an expected useful life of 10 years. The initial lease liability is Rs 4,00,000. It also made a Rs 50,000 payment to the lessor before commencement, incurred Rs 20,000 of initial direct costs, and received a Rs 30,000 lease incentive from the lessor. Ownership does not transfer and there is no purchase option. What is the depreciation on the right-of-use asset for year 1 on a straight-line basis?

Depreciation for year 1 is Rs 1,10,000. The right-of-use asset is Rs 4,40,000 after adding prepayment and initial direct costs and deducting the incentive. Since ownership does not transfer, it is depreciated over the shorter 4-year lease term rather than the 10-year useful life.

  1. ARs 44,000
  2. BRs 1,00,000
  3. CRs 1,10,000Correct
  4. DRs 1,17,500

Explanation

Right-of-use asset = 4,00,000 + 50,000 prepayment + 20,000 direct costs - 30,000 incentive = Rs 4,40,000. With no transfer of ownership or purchase option, it is depreciated over the shorter of lease term and useful life, i.e. 4 years: 4,40,000/4 = Rs 1,10,000. Rs 44,000 wrongly uses the 10-year life; Rs 1,17,500 adds the incentive instead of deducting it.

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