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CA Intermediate · Advanced Accounting · AS 19 Leases

Meera Pharma Ltd. recorded an asset under a finance lease at ₹3,00,000. The lease term is 4 years and the asset's useful life is 6 years. There is no reasonable certainty that Meera will obtain ownership at the end of the lease, and the residual value is nil. Meera depreciates similar owned assets on the straight-line method. What is the depreciation charge for the first year on the leased asset?

The first-year depreciation is ₹75,000. Since ownership is not reasonably certain, the asset is depreciated over the shorter of the 4-year lease term and the 6-year useful life, so ₹3,00,000 is written off equally over 4 years.

  1. A₹50,000
  2. B₹60,000
  3. C₹75,000Correct
  4. D₹1,00,000

Explanation

Where there is no reasonable certainty of ownership at the end of the lease term, the leased asset is fully depreciated over the shorter of the lease term and its useful life. The shorter period is 4 years, so depreciation is 3,00,000 / 4 = ₹75,000 per year. Using the 6-year useful life gives ₹50,000, which is wrong because that period is longer than the lease term.

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