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CA Intermediate · Advanced Accounting · AS 19 Leases

Sundaram Textiles Ltd. takes a machine on an operating lease for 4 years from 1 April. Fixed rentals are Rs 1,00,000 in year 1, Rs 1,20,000 in year 2, Rs 1,40,000 in year 3 and Rs 1,40,000 in year 4. The increases are not linked to inflation or to the lessor's cost, and no other systematic basis is more representative of the time pattern of the benefit. What lease rent should Sundaram charge to its Statement of Profit and Loss for year 1?

The charge for year 1 is Rs 1,25,000. AS 19 requires operating lease rentals to be expensed on a straight-line basis over the lease term unless another systematic basis fits better. Total rent of Rs 5,00,000 spread over four years gives Rs 1,25,000 each year, not the Rs 1,00,000 actually payable.

  1. ARs 1,00,000
  2. BRs 1,25,000Correct
  3. CRs 1,40,000
  4. DRs 5,00,000

Explanation

Under AS 19 the lessee recognises operating lease payments as an expense on a straight-line basis over the lease term. Total rentals are 1,00,000 + 1,20,000 + 1,40,000 + 1,40,000 = Rs 5,00,000, and 5,00,000 / 4 = Rs 1,25,000 per year. Charging the amount actually payable (Rs 1,00,000) ignores the straight-line requirement.

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