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CMA Final · Corporate Financial Reporting · Leases (Ind AS 116)

Sagar Foods Ltd enters a 5-year lease of a cold-storage unit, and ownership does not pass at the end of the term. Useful life of the unit is 8 years. The initial lease liability for the remaining payments is Rs 5,00,000. The company paid Rs 50,000 at commencement, incurred initial direct costs of Rs 20,000 and received a lease incentive of Rs 30,000 from the lessor. Ignoring any restoration costs, what is the annual straight-line depreciation on the right-of-use asset?

Annual depreciation is Rs 1,08,000. The right-of-use asset is Rs 5,40,000 (liability plus payment at commencement plus direct costs less incentive), and it is depreciated over the 5-year lease term, which is shorter than the 8-year useful life because ownership does not transfer.

  1. ARs 1,08,000Correct
  2. BRs 1,14,000
  3. CRs 67,500
  4. DRs 1,00,000

Explanation

Right-of-use asset = 5,00,000 + 50,000 + 20,000 - 30,000 = 5,40,000. Depreciation is over the shorter of lease term and useful life, which is 5 years, so 5,40,000/5 = 1,08,000. Rs 1,14,000 ignores the lease incentive, and Rs 67,500 wrongly uses the 8-year life.

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