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CA Intermediate · Advanced Accounting · AS 19 Leases

On 1 April 2025, Rudra Auto Components Ltd. acquires equipment under a finance lease. The lease liability is recognised at ₹5,00,000. The implicit interest rate is 12% per annum, and the lessee pays ₹2,00,000 at the end of each year. Finance charge is allocated so as to produce a constant periodic rate of interest on the outstanding liability. What is the outstanding lease liability on 31 March 2027, after the second payment?

The liability is ₹2,03,200. Year 1 interest is ₹60,000, which makes the closing balance ₹3,60,000. Year 2 interest is 12% of that balance, ₹43,200. After deducting the second payment of ₹2,00,000, the balance is ₹2,03,200.

  1. A₹2,03,200Correct
  2. B₹2,20,000
  3. C₹1,00,000
  4. D₹1,16,800

Explanation

Year 1 finance charge is 12% of ₹5,00,000 = ₹60,000. The closing liability is 5,00,000 + 60,000 − 2,00,000 = ₹3,60,000. Year 2 finance charge is 12% of ₹3,60,000 = ₹43,200. The closing liability is 3,60,000 + 43,200 − 2,00,000 = ₹2,03,200. Charging year 2 interest on the original ₹5,00,000 gives ₹2,20,000, which is wrong because interest must be on the outstanding balance.

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