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CA Intermediate · Advanced Accounting · AS 19 Leases

Sagar Textiles Ltd. takes a machine on a 3-year non-cancellable operating lease. The rentals payable at the end of each year are Rs 1,00,000, Rs 1,20,000 and Rs 1,40,000. The step-up is a fixed schedule agreed at the start and is not linked to the lessor's cost increases or to inflation. Another systematic basis is not more representative of the user's benefit. What lease rental expense should Sagar Textiles charge to the Statement of Profit and Loss in the first year?

The first-year expense is Rs 1,20,000. AS 19 requires operating lease rentals to be charged on a straight-line basis over the lease term, unless another systematic basis better reflects the user's benefit. Total rentals of Rs 3,60,000 spread over three years give Rs 1,20,000 annually, not the Rs 1,00,000 payable.

  1. ARs 1,00,000
  2. BRs 1,20,000Correct
  3. CRs 1,40,000
  4. DRs 3,60,000

Explanation

Under AS 19, lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative. Total rentals are 1,00,000 + 1,20,000 + 1,40,000 = Rs 3,60,000, and 3,60,000 / 3 = Rs 1,20,000 per year. Charging the amount actually payable (Rs 1,00,000) ignores the straight-line requirement.

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