CMA Intermediate · Financial Accounting · Lease Accounting
Sundaram Leasing Ltd. gave equipment on finance lease. The net investment at the start of the lease was Rs 2,00,000 and the rate implicit in the lease is 10% per annum. An annual lease payment of Rs 90,000 (with no service element) is received at the end of each year. What is the finance income for the second year?
Finance income for year two is Rs 13,000. Year one income of Rs 20,000 means Rs 70,000 of the Rs 90,000 payment reduces principal, leaving a net investment of Rs 1,30,000. Ten percent of that balance gives the second year's income.
- ARs 13,000Correct
- BRs 20,000
- CRs 11,000
- DRs 9,000
Explanation
Year 1 income = 10% of 2,00,000 = 20,000. The payment of 90,000 less income of 20,000 reduces principal by 70,000, so net investment at the start of year 2 is 1,30,000. Year 2 income = 10% of 1,30,000 = 13,000. Rs 11,000 wrongly deducts the full payment from 2,00,000 and ignores the income accrued in year 1.
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