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CA Intermediate · Advanced Accounting · AS 19 Leases

Sundaram Leasing Ltd. leases equipment costing Rs 8,00,000 (also its fair value) under a finance lease for 3 years. The lessee pays Rs 3,00,000 at the end of each year and guarantees a residual value of Rs 50,000 at the end of the term. In addition, Sundaram expects an unguaranteed residual value of Rs 30,000, and the lease has no initial direct costs. What is the unearned finance income at inception?

Unearned finance income is Rs 1,80,000. Gross investment is minimum lease payments of Rs 9,50,000 (rentals plus guaranteed residual) plus the unguaranteed residual of Rs 30,000, totalling Rs 9,80,000. Deducting the present value of Rs 8,00,000 leaves Rs 1,80,000.

  1. ARs 1,80,000Correct
  2. BRs 1,50,000
  3. CRs 1,00,000
  4. DRs 2,30,000

Explanation

Minimum lease payments = 9,00,000 rentals + 50,000 guaranteed residual = Rs 9,50,000. Gross investment = minimum lease payments + unguaranteed residual = 9,50,000 + 30,000 = Rs 9,80,000. Unearned finance income = gross investment less its present value (taken as the Rs 8,00,000 cost/fair value) = Rs 1,80,000. Rs 1,50,000 omits the unguaranteed residual, which is part of gross investment.

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