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CA Intermediate · Advanced Accounting · AS 19 Leases

Meera Pvt. Ltd. takes a warehouse on an operating lease for 3 years. The rent payable is ₹4,00,000 in year 1, ₹5,00,000 in year 2 and ₹6,00,000 in year 3. The increases are not linked to the lessor's expected inflationary cost increases, and no other systematic basis is more representative of the time pattern of Meera's benefit. What lease rent expense should Meera charge in the statement of profit and loss for year 1?

Meera should charge ₹5,00,000 for year 1. Operating lease rentals are expensed straight-line over the lease term when no other basis fits better, so total rent of ₹15,00,000 is spread equally over three years rather than following the rising cash payments.

  1. A₹4,00,000
  2. B₹5,00,000Correct
  3. C₹6,00,000
  4. D₹5,50,000

Explanation

Operating lease payments are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative. Total rent is 4+5+6 = ₹15,00,000, so the yearly charge is 15,00,000 ÷ 3 = ₹5,00,000. Charging the amount payable (₹4,00,000) follows the cash pattern, which is not the required basis here.

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