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CA Intermediate · Advanced Accounting · AS 19 Leases

Sunrise Textiles Ltd. takes a machine on a 3-year non-cancellable operating lease from Kaveri Leasing Ltd. The annual rentals are ₹2,00,000 in year 1, ₹3,00,000 in year 2 and ₹4,00,000 in year 3. The escalation is not linked to inflation or to the lessee's usage pattern, and no other systematic basis better represents the time pattern of the lessee's benefit. What lease expense should Sunrise Textiles recognise in the statement of profit and loss for year 1 under AS 19?

Sunrise Textiles should charge ₹3,00,000 as lease expense in year 1. AS 19 requires operating lease rentals to be expensed on a straight-line basis over the lease term when no other systematic basis fits better, so the total of ₹9,00,000 is spread equally over three years.

  1. A₹2,00,000, being the rent actually payable for the year
  2. B₹3,00,000, being the straight-line chargeCorrect
  3. C₹4,00,000, being the highest annual rental
  4. D₹9,00,000, being the total rentals recognised at the start

Explanation

For an operating lease, the lessee recognises lease payments as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the benefit pattern. Total rentals are 2,00,000 + 3,00,000 + 4,00,000 = 9,00,000, and 9,00,000 / 3 = 3,00,000 per year. Charging the rent actually payable would front-load the benefit incorrectly.

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