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CA Intermediate · Advanced Accounting · AS 19 Leases

On 1 April, Konkan Foods Ltd. acquires a cold-storage unit under a finance lease and records a lease liability of ₹5,00,000, equal to the present value of minimum lease payments at an implicit rate of 10% per annum. The first annual payment of ₹1,60,000 is made on 31 March of the next year. What is the outstanding lease liability after this payment?

The outstanding lease liability is ₹3,90,000. The finance charge for the year is 10% of ₹5,00,000, which is ₹50,000, so only ₹1,10,000 of the ₹1,60,000 payment reduces the liability, leaving ₹5,00,000 minus ₹1,10,000.

  1. A₹3,40,000
  2. B₹3,90,000Correct
  3. C₹4,40,000
  4. D₹4,50,000

Explanation

Finance charge for the year = 10% × 5,00,000 = 50,000. The payment of 1,60,000 is split into 50,000 finance charge and 1,10,000 reduction of liability. Outstanding liability = 5,00,000 − 1,10,000 = 3,90,000. Deducting the full payment (3,40,000) ignores that part of the payment is finance charge.

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