Skip to content

CA Intermediate · Advanced Accounting · AS 19 Leases

Vardhan Leasing Ltd. leases equipment costing ₹8,00,000 (equal to its fair value) to Mehta Fabrics Ltd. under a 3-year finance lease. Annual rentals are ₹3,00,000, payable at each year end. At the end of the lease, Mehta guarantees a residual value of ₹50,000. A further ₹30,000 of residual value is expected but is unguaranteed. The implicit rate is such that the present value of the gross investment equals ₹8,00,000. What is the total unearned finance income at inception?

Unearned finance income is ₹1,80,000. Gross investment is rentals of ₹9,00,000 plus the guaranteed residual of ₹50,000 and the unguaranteed residual of ₹30,000, totalling ₹9,80,000. Deducting the net investment of ₹8,00,000 leaves ₹1,80,000 of income to be recognised over the lease term.

  1. A₹1,80,000Correct
  2. B₹1,50,000
  3. C₹1,00,000
  4. D₹9,80,000

Explanation

Under AS 19, the lessor's gross investment is the minimum lease payments (including the guaranteed residual) plus any unguaranteed residual value. Gross investment = 9,00,000 + 50,000 + 30,000 = ₹9,80,000. Unearned finance income = gross investment − net investment (₹8,00,000) = ₹1,80,000. ₹1,50,000 omits the unguaranteed residual, and ₹1,00,000 omits both residuals.

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