Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

On 1 April 2026, Himalaya Foods Ltd. sold a packing plant to Orbit Finance Ltd. for ₹12,00,000, which equals its fair value. The carrying amount was ₹9,00,000. Himalaya immediately leased the plant back under a 5-year finance lease. How much of the profit on sale should Himalaya recognise in its statement of profit and loss for the year ended 31 March 2027, assuming the lease term is 5 years and straight-line allocation is appropriate?

Himalaya recognises ₹60,000. The profit on sale of ₹3,00,000 arises in a sale and leaseback that is a finance lease, so it is deferred and amortised over the five-year lease term, giving ₹60,000 per year rather than immediate recognition.

  1. A₹60,000Correct
  2. B₹3,00,000
  3. CNil, as the entire profit is credited to capital reserve
  4. D₹1,00,000

Explanation

In a sale and leaseback resulting in a finance lease, any excess of sale proceeds over carrying amount is not recognised immediately. It is deferred and amortised over the lease term. Profit = 12,00,000 − 9,00,000 = ₹3,00,000; amortisation = 3,00,000 / 5 = ₹60,000 per year. Recognising the full ₹3,00,000 at once is wrong.

Did you get it right without looking?

One question tells you little. A timed set on AS 19 Leases shows your real accuracy, how long you take and where you lose marks.

Practise AS 19 LeasesFree diagnostic mock

More AS 19 Leases questions