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CA Intermediate · Advanced Accounting · AS 19 Leases

Sundaram Textiles Ltd. enters into a finance lease for a machine. The fair value of the machine at inception is ₹10,00,000 and the present value of minimum lease payments, at the interest rate implicit in the lease, is ₹9,60,000. Sundaram incurs ₹20,000 as initial direct costs in negotiating the lease. At what amount should the machine be recognised as an asset in Sundaram's books under AS 19?

The machine is recognised at ₹9,80,000. The lessee takes the lower of fair value and present value of minimum lease payments, which is ₹9,60,000, and adds its own initial direct costs of ₹20,000 to it.

  1. A₹10,00,000
  2. B₹9,60,000
  3. C₹9,80,000Correct
  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 (₹9,60,000), which is ₹9,60,000. Initial direct costs of the lessee are added: ₹9,60,000 + ₹20,000 = ₹9,80,000. Using fair value ignores the 'lower of' rule.

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