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CA Intermediate · Advanced Accounting · AS 19 Leases

Navkar Machines Ltd. leases out equipment to Kalyani Textiles Ltd. under a 4-year operating lease. The contractual annual rentals are ₹1,50,000, ₹2,50,000, ₹3,50,000 and ₹4,50,000. The increases are not linked to expected inflation and no other systematic basis better reflects the time pattern of the benefit. How much lease rental income should Navkar recognise in the first year?

Navkar should recognise ₹3,00,000 in the first year. Operating lease income is spread on a straight-line basis over the lease term. Total rentals of ₹12,00,000 divided by four years give ₹3,00,000, regardless of the lower amount actually billed in year one.

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

Explanation

Lease income from an operating lease is recognised on a straight-line basis over the lease term unless another systematic basis is more representative. Total rentals are 1,50,000 + 2,50,000 + 3,50,000 + 4,50,000 = ₹12,00,000. Dividing by 4 years gives ₹3,00,000 a year. Recognising the contractual ₹1,50,000 follows the billing pattern, which is not the required basis.

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