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CA Intermediate · Advanced Accounting · AS 19 Leases

On 1 April 2025, Gupta Engineering Ltd. took machinery on a finance lease. The lease requires two annual payments of ₹1,21,000, each paid at the end of the year (31 March 2026 and 31 March 2027). The interest rate implicit in the lease is 10% p.a., and the fair value of the machinery equals the present value of the minimum lease payments. The machinery has a useful life of 2 years, equal to the lease term, with nil residual value, and is depreciated on the straight-line method. What is the total charge to the Statement of Profit and Loss for the year ended 31 March 2027 (depreciation plus finance charge)?

The total charge is ₹1,16,000. The asset and initial liability are ₹2,10,000, so annual depreciation is ₹1,05,000. After year 1 the liability is ₹1,10,000, so the year-2 finance charge at 10% is ₹11,000. Adding depreciation and finance charge gives ₹1,16,000.

  1. A₹1,16,000Correct
  2. B₹1,26,000
  3. C₹1,21,000
  4. D₹1,05,000

Explanation

PV of payments = 1,21,000/1.10 + 1,21,000/1.21 = 1,10,000 + 1,00,000 = ₹2,10,000, which is the asset value. Year 1 finance charge = 21,000, so liability after the first payment = 2,10,000 + 21,000 − 1,21,000 = 1,10,000. Year 2 finance charge = 10% of 1,10,000 = 11,000 (check: 1,21,000 − 1,10,000). Depreciation = 2,10,000 ÷ 2 = 1,05,000. Total = 1,05,000 + 11,000 = ₹1,16,000. ₹1,26,000 wrongly uses year 1's finance charge of 21,000.

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