Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Sundaram Traders takes a warehouse on operating lease from Kaveri Estates for 3 years. The rentals fixed in the agreement are ₹1,00,000 in year 1, ₹1,20,000 in year 2 and ₹1,40,000 in year 3. The increases are not linked to inflation or to the lessor's expected cost increases, and no other systematic basis is more representative of the time pattern of the lessee's benefit. What lease rent expense should Sundaram Traders charge to its Statement of Profit and Loss in year 1 as per AS 19?

The lessee should charge ₹1,20,000 in year 1. AS 19 requires operating lease rentals to be recognised on a straight-line basis over the lease term when no other systematic basis is more representative. Total rent of ₹3,60,000 spread over 3 years gives ₹1,20,000 each year.

  1. A₹1,00,000, being the rent payable for year 1
  2. B₹1,20,000, being the straight-line average of total rentalsCorrect
  3. C₹1,40,000, being the highest rent in the term
  4. D₹3,60,000, being the total rent for the term

Explanation

For an operating lease, the lessee recognises rentals on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of benefit. Total rent is 1,00,000 + 1,20,000 + 1,40,000 = 3,60,000, and 3,60,000 / 3 = 1,20,000 per year. Charging the amount payable each year (1,00,000) is wrong because the payment pattern does not match the benefit pattern here.

Did you get it right without looking?

One question tells you little. A timed set on AS 19 Leases shows your real accuracy, how long you take and where you lose marks.

Practise AS 19 LeasesFree diagnostic mock

More AS 19 Leases questions