Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Tulsi Foods Ltd. acquires a packing machine under a finance lease and records the asset and the liability at Rs 2,50,000. The implicit rate is 10% per annum, and the first annual payment of Rs 1,10,000 is made at the end of year 1. What is the outstanding lease liability immediately after the first payment?

Rs 1,65,000. The year-1 finance charge is 10% of Rs 2,50,000, which is Rs 25,000. Of the Rs 1,10,000 payment, Rs 85,000 reduces the principal, leaving a liability of Rs 1,65,000. Deducting the full payment from the principal would wrongly give Rs 1,40,000.

  1. ARs 1,40,000
  2. BRs 1,15,000
  3. CRs 1,65,000Correct
  4. DRs 2,75,000

Explanation

The finance charge for year 1 is 10% of 2,50,000 = Rs 25,000. The payment of Rs 1,10,000 is split into Rs 25,000 finance charge and Rs 85,000 reduction of principal. The closing liability is 2,50,000 − 85,000 = Rs 1,65,000. Rs 1,40,000 is wrong because it ignores the finance charge and deducts the whole payment from the principal.

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