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CA Intermediate · Advanced Accounting · AS 19 Leases

Meridian Finance Ltd leases machinery to Anand Textiles under a finance lease. The lease is for 4 years with annual payments of ₹3,00,000 receivable at the end of each year. The unguaranteed residual value at the end of the lease is ₹1,00,000. The fair value of the machinery is ₹11,00,000, which equals the present value of the gross investment at the interest rate implicit in the lease. There are no initial direct costs. What is the unearned finance income at the inception of the lease?

The unearned finance income is ₹2,00,000. Under AS 19 it is the gross investment minus its present value. Gross investment is lease payments of ₹12,00,000 plus unguaranteed residual of ₹1,00,000, totalling ₹13,00,000. Deducting the present value of ₹11,00,000 leaves ₹2,00,000.

  1. A₹1,00,000
  2. B₹2,00,000Correct
  3. C₹3,00,000
  4. D₹13,00,000

Explanation

Gross investment = minimum lease payments (4 × 3,00,000 = 12,00,000) + unguaranteed residual value (1,00,000) = 13,00,000. Unearned finance income = gross investment − present value of gross investment = 13,00,000 − 11,00,000 = 2,00,000. The ₹1,00,000 option wrongly leaves out the unguaranteed residual value from the gross investment.

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