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CMA Intermediate · Financial Accounting · Lease Accounting

On what basis does a lessor under AS 19 allocate finance income over the term of a finance lease?

Finance income is allocated on a systematic and rational basis that gives a constant periodic return on the lessor's net investment outstanding. Because the net investment reduces as payments are received, finance income declines over the lease term and is not spread equally or recognised upfront.

  1. AA pattern reflecting a constant periodic return on the lessor's net investment outstandingCorrect
  2. BEqual amounts in each year of the lease term
  3. CIn proportion to the depreciation that would be charged on the asset
  4. DThe whole amount in the year the lease starts

Explanation

AS 19 says the lessor allocates finance income on a systematic and rational basis reflecting a constant periodic return on the net investment outstanding. As the net investment falls with each payment, income falls too, so equal annual amounts do not follow this basis.

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