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CA Intermediate · Advanced Accounting · AS 19 Leases

Sunrise Textiles Ltd. takes a machine on an operating lease for 3 years. Annual rentals are Rs 1,00,000 in year 1, Rs 1,20,000 in year 2 and Rs 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 represents the time pattern of the lessee's benefit better. How much lease rent should Sunrise Textiles charge to the statement of profit and loss each year?

Rs 1,20,000 each year. 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. Total rent of Rs 3,60,000 divided by three years gives Rs 1,20,000 annually, regardless of the actual payment schedule.

  1. ARs 1,00,000 in each year
  2. BRs 1,20,000 in each yearCorrect
  3. CRs 1,40,000 in each year
  4. DRs 1,00,000, Rs 1,20,000 and Rs 1,40,000 in years 1, 2 and 3 respectively

Explanation

Under AS 19, operating lease payments are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the user's benefit. Total rent is 1,00,000 + 1,20,000 + 1,40,000 = Rs 3,60,000, and 3,60,000 / 3 = Rs 1,20,000 a year. Charging the rent actually payable each year is wrong because the escalation is not tied to the pattern of benefit.

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