CMA Intermediate · Financial Accounting · Lease Accounting
Sunrise Textiles Ltd acquires a machine under a finance lease. The asset is recognised at ₹6,00,000 with nil residual value. The lease term is 4 years and the useful life is 10 years. There is no reasonable certainty that Sunrise will obtain ownership at the end of the lease term. What is the annual depreciation charge?
Annual depreciation is ₹1,50,000. Since ownership is not reasonably certain, the asset is depreciated over the shorter of the lease term (4 years) and useful life (10 years). Dividing ₹6,00,000 by 4 years gives ₹1,50,000 each year.
- A₹1,50,000Correct
- B₹60,000
- C₹3,00,000
- D₹6,00,000
Explanation
Without 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 6,00,000 / 4 = ₹1,50,000. Using the 10-year useful life gives ₹60,000, which applies only if ownership is reasonably certain.
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