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CA Intermediate · Advanced Accounting · AS 19 Leases

Vikram Traders took a warehouse on an operating lease from Shree Estates for 3 years. The lease has fixed annual rentals of ₹2,00,000 for year 1, ₹3,00,000 for year 2 and ₹4,00,000 for year 3. The escalation is not linked to inflation or to any other benefit pattern, and no other systematic basis better represents the time pattern of Vikram's benefit. What rent expense should Vikram recognise in year 1 under AS 19?

The expense for year 1 is ₹3,00,000. AS 19 requires a lessee to recognise operating lease rentals on a straight-line basis over the lease term, so the total of ₹9,00,000 is spread equally over three years, rather than expensing the amount actually payable each year.

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

Explanation

For an operating lease, the lessee recognises rentals on a straight-line basis over the lease term unless another systematic basis is more representative of the benefit pattern. Total rentals are 2,00,000 + 3,00,000 + 4,00,000 = ₹9,00,000, and 9,00,000 / 3 = ₹3,00,000 per year. Using the amount payable in year 1 (₹2,00,000) would be wrong because the escalating rentals are not tied to the pattern of benefit.

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