Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Orbit Leasing Ltd. leases equipment, whose fair value and cost is Rs 8,00,000, to Nova Industries Ltd. under a finance lease. Nova pays 4 annual rentals of Rs 2,50,000 at the end of each year. Nova guarantees a residual value of Rs 50,000 at the end of year 4, and Orbit estimates a further unguaranteed residual value of Rs 40,000. There are no initial direct costs, and the implicit rate makes the net investment equal to the fair value. What is the unearned finance income of Orbit Leasing at inception?

Rs 2,90,000. Gross investment equals minimum lease payments of Rs 10,50,000 (rentals plus guaranteed residual) plus the unguaranteed residual of Rs 40,000, which is Rs 10,90,000. Subtracting the net investment of Rs 8,00,000 leaves unearned finance income of Rs 2,90,000.

  1. ARs 2,00,000
  2. BRs 2,50,000
  3. CRs 2,90,000Correct
  4. DRs 10,90,000

Explanation

Gross investment is the minimum lease payments plus the unguaranteed residual value. Minimum lease payments are 4 × 2,50,000 = 10,00,000 plus the guaranteed residual of 50,000, which gives 10,50,000. Adding the unguaranteed residual of 40,000 gives a gross investment of Rs 10,90,000. Unearned finance income is gross investment minus net investment (the present value, equal to Rs 8,00,000 here), so 10,90,000 − 8,00,000 = Rs 2,90,000. Rs 2,50,000 is wrong because it leaves out the unguaranteed residual value.

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