CMA Intermediate · Financial Accounting · Lease Accounting
Sundaram Textiles Ltd takes machinery on a finance lease recognised at ₹12,00,000. The lease term is 4 years, the useful life is 6 years, residual value is nil, and there is no reasonable certainty that the lessee will obtain ownership at the end of the lease term. Straight-line depreciation is the company's policy for owned assets. What annual depreciation should be charged on the leased asset?
Annual depreciation is ₹3,00,000. Because ownership is not reasonably certain, the asset is written off over the shorter of the lease term (4 years) and useful life (6 years). Dividing ₹12,00,000 by 4 years gives ₹3,00,000 a year.
- A₹2,00,000
- B₹3,00,000Correct
- C₹4,00,000
- D₹1,50,000
Explanation
With no reasonable certainty of ownership, the asset is depreciated over the lease term or useful life, whichever is shorter. The shorter period is 4 years, so depreciation is 12,00,000 / 4 = ₹3,00,000. Using the 6-year useful life gives ₹2,00,000, which is wrong here.
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