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CA Intermediate · Advanced Accounting · AS 19 Leases

Mahesh Industries Ltd. acquires equipment on a finance lease. The fair value is ₹2,00,000, the implicit rate is 10% p.a., and there is no residual value or guaranteed value. Lease payments are ₹1,10,000 at the end of year 1 and ₹1,21,000 at the end of year 2, and the present value of these payments equals the fair value. The asset is depreciated on the straight-line basis over the 2-year lease term, and the lessee ownership is not transferred. What is the total charge to the statement of profit and loss in year 1 for this lease (depreciation plus finance charge)?

The year 1 charge is ₹1,20,000, being depreciation of ₹1,00,000 (₹2,00,000 over two years) plus a finance charge of ₹20,000 (10% on the opening liability of ₹2,00,000). The rental actually paid is not charged as such under a finance lease.

  1. A₹1,10,000
  2. B₹1,00,000
  3. C₹1,20,000Correct
  4. D₹1,31,000

Explanation

Finance charge for year 1 is 10% of ₹2,00,000 = ₹20,000. Depreciation is ₹2,00,000 / 2 = ₹1,00,000. Total charge is ₹1,20,000. Check: outstanding liability after year 1 is 2,00,000 + 20,000 - 1,10,000 = ₹1,10,000, and year 2 payment of ₹1,21,000 equals 1,10,000 plus 10% interest, so the data reconcile. Charging the rental paid (₹1,10,000) is the operating lease treatment and is wrong here.

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