CMA Intermediate · Financial Accounting · Lease Accounting
Narmada Leasing Ltd is the lessor under a finance lease. Its net investment at the start of Year 1 is ₹3,00,000 and the rate implicit in the lease is 10% per annum. The lessee pays ₹1,20,000 at the end of each year. Finance income is allocated to give a constant periodic return on the net investment outstanding. What is the finance income for Year 2?
Year 2 finance income is ₹21,000. Year 1 income of ₹30,000 means the ₹1,20,000 payment reduces net investment by ₹90,000 to ₹2,10,000. A constant 10% return on that outstanding balance gives ₹21,000.
- A₹21,000Correct
- B₹30,000
- C₹12,000
- D₹18,000
Explanation
Year 1 income is 10% of 3,00,000 = ₹30,000. The payment of 1,20,000 reduces both principal and unearned income, so the net investment falls by 1,20,000 − 30,000 = 90,000 to ₹2,10,000. Year 2 income is 10% of 2,10,000 = ₹21,000. Using ₹3,00,000 again gives ₹30,000, which ignores the reduction in net investment.
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