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CMA Intermediate · Financial Accounting · Lease Accounting

Under AS 19 Leases, the interest rate implicit in the lease is the discount rate that, at the inception of the lease, makes the aggregate present value of which items equal to the fair value of the leased asset?

The implicit rate is the discount rate that equates the present value of the lessor's minimum lease payments and any unguaranteed residual value accruing to the lessor with the fair value of the leased asset at inception of the lease.

  1. AMinimum lease payments from the lessor's standpoint and any unguaranteed residual value accruing to the lessorCorrect
  2. BMinimum lease payments from the lessee's standpoint and the lessee's incremental borrowing cost
  3. CGross investment in the lease and the unearned finance income
  4. DContingent rent and the costs for services reimbursed to the lessor

Explanation

AS 19 defines the implicit rate as the rate at which the present value of the lessor's minimum lease payments plus any unguaranteed residual value accruing to the lessor equals the fair value of the asset at inception. The lessee's incremental borrowing rate is only a fallback when the implicit rate cannot practicably be determined. Contingent rent and service costs are excluded from minimum lease payments.

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