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CA Intermediate · Advanced Accounting · AS 19 Leases

Sundaram Engineering Ltd. enters a finance lease for a machine. The fair value of the machine at inception is ₹10,00,000. The present value of minimum lease payments, at the interest rate implicit in the lease, is ₹9,40,000. The lessee paid ₹20,000 as initial direct costs of negotiating the lease. At what amount should the lessee recognise the asset?

The asset is recognised at ₹9,60,000. AS 19 requires the lessee to take the lower of fair value and present value of minimum lease payments, which is ₹9,40,000, and then add the lessee's initial direct costs of ₹20,000 to arrive at the carrying amount.

  1. A₹9,40,000
  2. B₹9,60,000Correct
  3. C₹10,00,000
  4. D₹10,20,000

Explanation

The lessee records the asset at the lower of fair value (₹10,00,000) and present value of minimum lease payments (₹9,40,000), i.e. ₹9,40,000. Initial direct costs of ₹20,000 are added to the asset, giving ₹9,60,000. The liability is recognised at ₹9,40,000 only.

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