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CA Intermediate · Advanced Accounting · AS 19 Leases

Rohini Steels Ltd. sells a machine with carrying amount ₹6,00,000 to a finance company for ₹8,00,000 and immediately leases it back under a finance lease for 5 years. As per AS 19, what amount of the profit on sale will be credited to the Statement of Profit and Loss each year?

₹40,000 is credited each year. In a sale and leaseback that is a finance lease, the ₹2,00,000 excess of sale price over carrying amount is deferred and amortised over the 5-year lease term instead of being recognised immediately.

  1. A₹2,00,000 in the year of sale
  2. B₹40,000 each yearCorrect
  3. C₹1,60,000 each year
  4. D₹1,20,000 each year

Explanation

In a sale and leaseback resulting in a finance lease, the excess of sale proceeds over carrying amount is not recognised immediately. It is deferred and amortised over the lease term. Excess = 8,00,000 − 6,00,000 = ₹2,00,000; ÷ 5 years = ₹40,000 per year.

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