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CA Intermediate · Advanced Accounting · AS 19 Leases

Mehta Finance Ltd. leases equipment under a finance lease. The lessee will pay Rs 4,00,000 at the end of each of 3 years. The lessee also guarantees a residual value of Rs 1,00,000 at the end of the lease term. The lessor estimates a further unguaranteed residual value of Rs 50,000. The fair value of the equipment is Rs 11,00,000, and it equals the present value of the gross investment at the implicit rate. What is the unearned finance income at inception?

Unearned finance income is Rs 2,50,000. Gross investment is the minimum lease payments of Rs 13,00,000 (including the guaranteed residual) plus the unguaranteed residual of Rs 50,000, totalling Rs 13,50,000. Subtracting its present value of Rs 11,00,000 gives the unearned finance income.

  1. ARs 1,00,000
  2. BRs 2,00,000
  3. CRs 2,50,000Correct
  4. DRs 3,50,000

Explanation

Minimum lease payments = 3 x 4,00,000 + 1,00,000 guaranteed residual = Rs 13,00,000. Gross investment = minimum lease payments + unguaranteed residual = 13,00,000 + 50,000 = Rs 13,50,000. Unearned finance income = gross investment - present value of gross investment = 13,50,000 - 11,00,000 = Rs 2,50,000. Omitting the unguaranteed residual gives Rs 2,00,000.

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