CMA Final · Strategic Financial Management · Leasing Decisions
Under a finance lease, the lessee Sagar Foods pays ₹2,00,000 at the end of each year for 3 years. The lessee's incremental borrowing rate is 10% and the rate implicit in the lease is not readily determinable. Using the 10% annuity factor for 3 years of 2.487, what is the initial lease liability under Ind AS 116?
The initial lease liability is ₹4,97,400. Under Ind AS 116, when the implicit rate cannot be readily determined, the lessee discounts lease payments at its incremental borrowing rate, so ₹2,00,000 times the 3-year annuity factor of 2.487 gives ₹4,97,400.
- A₹4,97,400Correct
- B₹6,00,000
- C₹5,47,140
- D₹4,52,182
Explanation
Lease liability is the PV of unpaid lease payments discounted at the incremental borrowing rate when the implicit rate cannot be determined. 2,00,000 × 2.487 = 4,97,400. ₹6,00,000 is undiscounted total.
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