AS-19 - ACCOUNTING FOR LEASES

Objective and scope As- 19 is mandatory in nature and is applicable to all enterprises in respect of
assets leased during the period commencing on after 1-4-2001.

Lease arrangement is a specific type of a transaction in which one party, called as lessor, allows the use
of an asset to another party, called lessee, in return for a rental. It is not a sale or purchase transaction.
Lease allows the user to use the asset for a limited period or for almost the full economic life even without
owning the asset.
The objective of AS- 19 is to provide for accounting treatment of lease transactions in the books of both
the parties. It covers lease arrangements for asset except the following:
 Lease arrangements to explore for or use natural resources, such as oil, land, gas timber, metals
and other mineral rights and
 Licensing agreements for items such as motion pictures films, video recordings, patents and
copyrights.

Classification of leases:
Lease may be two types;
 Finance and
 operating lease
A lease is classified as finance lease in any of the following situations-
 The lease transfers ownership of the asset at a price.
 The lessee has the option to purchase the asset at a particular price.
 The lease term is for the major part of the economic life of the asset
 At the inception of the lease, the present value of the minimum lease payment is equal to the fair
value of the leased asset.
.
A lease which is not an operating lease is classified as an operating lease.

Leases in the financial statements of lessees

Finance leases
At the inception of a finance lease, the lessee should recognise the lease as an asset and a liability. Such
Recognisation should be at an amount equal to the fair value of the leased asset at the inception of the
lease, or the present value of the minimum lease payments from the standpoint of the lessee, whichever
is less. In calculating the present value of the minimum lease payments, the discount rate is the interest
rate implicit in the lease. If this implicit interest rate is not available, the discount rate is the lessee‟s
incremental borrowing rate.
The leased asset should be depreciated over the lease period or the useful life economic life which ever
is shorter, on a systematic basis as per AS-6, as if the lessee is owner of the asset. The depreciation
amount, which affects the carrying amount of leased asset, and the finance expenses, which affect the
related liability, may not be same. Consequently, the carrying amount of asset and the related liability
may not be equal in the balance sheet.
Lease rentals should be apportioned and recognised as repayment of liability (that is Principal amount
recognised at the inception of lease) and payment of interest should be computed and recognised on
reducing balance basis.
Initial direct costs e.g. legal fee, registration expenses etc., should be added to cost of the asset.
Operating leases
Asset under lease should not be recorded.
In case of operating lease, the lessee gets or uses the asset for a limited period or for limited purpose.
The rental paid to the lessor is in the nature of revenue expense for the period. The rental paid to the
lessor during the period is charged against the income of the period. Operating lease does not affect the
balance sheet of the lessee.

Leases in the financial statements of lessors

Finance leases
The lessor should recognise assets given under a finance lease in its balance sheet as a receivable at an
amount equal to the net investment in the lease. Net investment in Lease = Present Value of Minimum
Lease Payment (from lessor point of view) + Present value of unguaranteed residual value accruing to
Lessor .
Depreciation should not be recorded by lessor.
Lease rentals should be apportioned and recognised as receipt against “Receivable” ( i.e. Principal
amount recognised at the inception of lease) and interest income. Interest should be computed and
recognised on reducing balance basis.
Initial direct costs such as legal fee, registration expenses et-cetera should be written off in the profit and
loss a/c immediately or may be deferred over lease term.

Operating lease
The lessor should present an asset given under operating lease in its balance sheet under fixed assets.
Lease income from operating leases should be recognised in the statement of profit and loss on a straight
line basis over the lease term, or on some other systematic basis. The depreciation on leased assets
should be based on the normal depreciation policy of the lessor for similar assets, and the AS-6.
The depreciation amount and other costs incurred to earn the lease income are treated as expenses in
the income statement.
If the lessor of the opening lease is the manufacturer / dealer of the asset, then the selling profit which
arises in case of normal sale is not recognised, because the operating lease is not a sale.

Sale and leaseback transactions –

A sale and leaseback transaction involves the sale of an asset by the owner and the leasing of the same
asset back by the buyer [lessor] to the vendor [lessee]. The accounting treatment of sale and lease-back
transaction depends upon the type of lease involved. If a Sale and leaseback transaction results in a
finance lease, any difference between the sale proceeds and the carrying amount should not be
immediately recognised as income or loss by the seller- lessee. Instead, it should be deferred and
amortised over the lease term in proportion to the depreciation of the leased asset.
If a sale and lease back transaction results in an operating lease, any profit or loss should be recognised
as per the principles laid down in AS- 19. The profit or loss on sale depends upon the selling price, fair
value and the carrying amount of the asset. It may be noted that in case, these three values are same;
there is no profit and no loss situation. A profit will arise when the fair value of the asset is more than the
carrying amount and a loss will arise when the fair value is less than the carrying amount.

Disclosure by lessee

Fiancé lease
Asset acquired under finance lease as segregated from assets owned
The net carrying amount of the leased assets
Reconciliation between the total of minimum lease payments at the balance sheet date and their present
value. The total of minimum lease payments at the balance sheet date, and their present value, for each
of the following periods- not later than one year, later than one year and not later than five years, later
than five years.

Operating lease –
Lease payments under an operating lease should be recognised as an expense in the statement of profit
and loss on a straight line basis over the lease term even if the payments are not equal. The lessee
should also disclose-
The total of future minimum lease payments lease payments for each of the following periods -Not later
than one year; later than one year and not later than five year ; later than five years
The total of future minimum sublease payments expected to be received
Lease payments recognised in the statement of profit and loss for the period.

Disclosure by lessor

Finance lease
In case of finance lease, the lessor should disclose
Reconciliation between the total gross investment in the lease, and the present value of minimum lease
payments receivable at the balance sheet date. In addition, an enterprise should disclose the total gross
investment in the lease and the present value of minimum lease payments receivable at the balance
sheet date, for each of the following periods-
Not later than one year
Later than one year and not later than five years
Later than five years
Unearned fiancé income

Operating lease
Assets leased on operating lease should be shown in the balance sheet as fixed asset, as per AS- 10 ,
depreciation on these assets and impairment losses on these assets should be shown in the financial
statements.
Lease rentals received in respect of operating lease should be shown as revenue in the profit and loss
account on straight line basis or some other systematic basis, over the lease period. Costs
including depreciation incurred in earning the lease income are recognised as expense of the
period.

Other terms
Guaranteed residual value in the case of lessee, is that part of the residual value which is guaranteed
by the lessee or by a party on behalf of the lessee, and in the case of the lessor , is that part of the
residual value which is guaranteed by or on behalf of the lessee to the lessor.

Unguaranteed residual value (UGRV) – of a leased asset is the difference between expected residual
value [ERV] of the asset and it‟s GRV.

Gross investment - is the aggregate of the minimum lease payments under a finance lease from stand
point of the lessor plus any UGRV accruing to the lessor.
Net investment in the lease – is the gross investment in the lease less unearned finance income.

Unearned finance income is the difference between – Gross investment in the lease and the PV of MLP
[Minimum Lease Payment] under a finance lease from standpoint of the lessor and any UGRV accruing to
the lessor, at the interest rate implicit in the lease.
Minimum lease payment from lessee point of view : payments over lease term + any residual value
guaranteed by lessee or on behalf of lessee.
Minimum lease payments from the point of lessor : payment over lease term + + any residual value
guaranteed by lessee or on behalf of lessee or by an independent third party.

Problem -1
Comment whether following is operating or finance lease –
A computer has a life of 4 years and has been leased for 4 years after which it would be returned to
lessor. Responsibility for repair, maintain, insure and upgrade the leased asset has been assumed by the
lessor.
Hint – finance lease

Problem – 2
Winsome limited is in the business of providing cars to Corporates on yearly contract basis. The life of a
car is estimated at 10 years. Lease rental for a lease of one year is Rs. 1,50,000. After 1 year , the lease
agreement may be renewed . in case, the specific car creates problem, it is to be replaced by winsome
limited by another similar car. Comment upon the nature of lease.
Hint – it is a case of operating lease.

Problem -3
Jageshwar pilgrimage limited lease out an asset on the following terms and conditions:
 Cost of the asset 20 lacs
 Lease period 5 years
 Annual lease rental 5,96,650
 Life of the asset 5 years
 The implicit rate of interest is 15% that is the present value of lease rentals is almost equal to 20
lacs. Other terms are –
 Annual repairs and maintenance to be provided by lessor
 One operator to be provided by the lessor on a regular basis, through out the lease period
 The lessee not to make any alteration in the asset during the lease period
 The lessee not to make any alteration in the asset during the lease period
 The lessee to take insurance for the asset
Jageshwar limited has classified this lease as an operating lease on the ground that repairs and
maintenance to be provided by it as well as one operator to be deputed at lessee‟s premises through out
the lease period . Critically comment.
Hint -case of finance lease.
 Problem -4
Following information is available in respect of lease
Cost of asset Rs. 250,000
Monthly rentals Rs. 7,000
Term [equal to estimated life] 40 months ( 3.3 years)
Monthly payment for other services Rs. 2,000
Total monthly payment Rs. 9,000
Residual value losses to be borne by lessee.
Examine the above as a finance lease from the point of view of the lessee given that his incremental
borrowing rate is 12% p.a.
Hint :Case of finance lease

Problem – 5
Haseen Vaadiyaan limited sold a machine on 31.3.2014 which has a carrying amount of Rs. 2,50,000, at
a sale price of Rs. 4,00,000 to Khoobsurat Nazaare Limited. The machine was immediately leased back
to Haseen Vaadiyaan limited for the remaining useful life that is 12 years. How much amount should be
treated as deferred gain by Haseen Vaadiyaan Limited?
Hint – gain of Rs. 1,50,000 on sale is deferred gain and it should be recognised by the seller – lessee
over the lease period in proportion to the depreciation of the leased asset.

Problem – 6
Lessee limited took a machine on 10 year finance lease. It is required to pay a lease rental of Rs. 60,000
per annum together with Rs. 5,000 for other services. The implicit rate of interest of lessee limited is 10%.
The present value factor @ 10% for a period of 10 years is 6.145. Find out the amount of lease liability at
the inception of the lease. Also, give the treatment of Rs. 5,000 payable by lessee limited for other
services.
Answer
Lessee limited is required to make annual payment of Rs. 60,000 for a period of 10 years. The implicit
rate of interest for Lessee Limited is given 10%. The amount of liability to Lessee Limited is the present
value of the minimum lease payments.
PV = annual payment x PV of annuity factor for 10 years @ 10%
= 60,000 x 6.145
Rs. 3,68,700
So lessee Limited should recognise the lease liability at Rs. 3,68,700. The payment of Rs. 5,000 per
annum for other services is in the nature of revenue expenses and should be charged to Profit and loss
account every year.
 Problem 7
Stunning Limited took a 7 year finance lease under which the annual lease rental has been fixed at Rs.
1,20,000. The implicit rate of interest has been estimated at 11%. Find out the finance charge for different
years.
Solution –
Annual lease rental is Rs. 1,20,000 for a period of 7 years. The fair value of the asset is equal to the PV
@ 11% that is Rs. 1,20,000 x PV factor at the rate of 11% for 7 years that is 4.712.
PV= 1,20,000 x 4.712 = 5,65,440
The finance charge can be ascertained as follows
Year Payment Finance charge Repayment Outstanding
11% of outstanding
amount
0 - - - 5,65,440
1 1,20,000 62,200 57,800 5,07,640
2 1,20,000 55,840 64,160 4,43,480
3 1,20,000 48,780 71,220 3,72,260
4 1,20,000 40,950 79,050 2,93,210
5 1,20,000 32,250 87,750 2,05,460
6 1,20,000 22,600 97,400 1,08,060
7 1,20,000 11,940 1,08,060 -

Finance charge for different years has been computed @ 11% on the amount outstanding in the
beginning of the year. For the last year, the interest has been adjusted for the approximations made in
earlier years.

Problem – 8
Give and Take limited sold one of its plant , with estimated remaining life of 5 years , and immediately
lease it back for a period of 5 years. The relevant information is
Carrying amount is Rs. 4,90,000
Selling price Rs. 4,60,000
PV of lease payments Rs. 5,20,000
Find out deferred loss or gain to Give and Take limited.
Answer -
As per AS -19, in case of sale and lease back transaction resulting in a finance lease, the loss need not
be recognised immediately rather should be deferred and amortised over the lease period. In the given
case , deferred loss of Rs. 30,000 should be amortised over 5 years.

Problem – 9
Footfalls Limited took a machine on lease from waterfalls limited on the following terms-
Annual lease rental Rs. 50,000
  Useful life 15 years
 Lease term 13 years
 Implicit rate of interest 15%
At the end of the lease period, the expected fair value of the asset is Rs. 75,000 and Footfalls Limited has
an option to buy the asset at this price. You are required to find out the amount at which the finance lease
be recognised in the books by Footfalls Limited.
Hint
Lease should be recognised as follows =
PV = annual lease payment x PV factor for 13 years
50,000 x 5.583 = 2,79,150

Problem – 10
Following information is available in respect of lease agreement
Lease term 4 years
Annual lease rental Rs. 1,50,000
Guaranteed Residual Value [GRV] Rs. 30,000
Estimated residual value for lessor Rs. 18,000
Implicit interest rate 16%
Find out the amount at which lease should be recognised by the lessee. Also find out the finance charge
for different years.
Solution -
Recognised amount = PV of Minimum lease payments + GRV
1,50,000 x 2.798 + 30,000 x .552
4,19,700 + 16,560
4,36,260
The finance charge can be ascertained as follows
Year Payment Finance charge Repayment Outstanding
16% of O/S amount Payment less
finance
charges
0 - - - 4,36,260
1 1,50,000 69,800 80,200 3,56,060
2 1,50,000 56,970 93,030 2,63,030
3 1,50,000 42,080 1,07,920 1,55,110
4 1,50,000 24,890 1,25,110 30,000

Problem – 11
Find out the amount of depreciation [based on SLM] for the leased asset in problem 10. How the
difference between the GRV and ERV will be accounted for?
Depreciation : 4,32,260 -18,000 ÷ 4 = 1,03,565
Since GRV is 30,000 and ERV will be 18,000 lessee will have to make a payment of Rs. 12,000 from his
resources.
 Problem -12
Indian giants limited has initiated a lease for a period of three years in respect of a machine costing Rs.
1,50,000 with an expected useful life of 4 years. Under the lease agreement, the asset would revert back
to India giants limited at the end of lease period.
The un-guaranteed residual value [UGRV] of asset after the lease term is estimated at Rs. 20,000.
The implicit rate of interest is 10% and the annual lease payments have been determined in such a way
that the present value of lease payment plus residual value is equal to the fair value[cost] of the asset.
Find out the amount of annual lease payment, gross investment in the asset, net investment in the asset
and unearned finance income from the point of view of Indian Giants Limited, the lessor.

Present value of unguaranteed Residual 20,000 x .7513 15,026

Value
Present value of lease Payments ( 1,50,000 – 15,026 1,34,974
means Lease Payments + GRV)
Percentage of lease payments to Fair 1,34,974 / 1,50,000 x 100 90 % covers substantial
Value portion of Fair Value ;
therefore Finance lease
Annual lease Payments = PV of lease 1,34,974 / 2.24868 60,024
payments / PV of Annuity Factor at 10%
for 3 years
Gross investments = Lease Payments + (60,024 x 3 = 1,80,072)+ 200,072
GRV + UGRV UGRV 20,000
Less : PV of MLP + UGRV 1,34,974 + 20,000 1,54,974
Unearned finance income 45,098

Problem – 13
H Ltd. sold machinery having WDV of Rs. 400 Lakhs to B Ltd. for Rs. 500 Lakhs and the same machinery
was leased back by B Ltd. to H Ltd. The Lease back is operating lease.
Comment if –
a)Sale price of Rs. 500 lakhs is equal to fair value
b)Fair value is Rs. 600 lakhs
c)Fair value is Rs. 450 lakhs and sale price is Rs. 380 lakhs
d)Fair value is Rs. 400 lakhs and sale price is Rs. 500 lakhs
e)Fair value is Rs. 460 lakhs and sale price is Rs. 500 lakhs
f)Fair value is Rs. 350 lakhs and sale price is Rs. 390 lakhs
Answer :
a)H ltd. should immediately recognize the profit of Rs. 100 lakhs in its books. ( SP > WDV)
b)Profit Rs. 100 lakhs should be immediately recognized by H Ltd.
c)Loss of Rs. 20 lakhs to be immediately recognized by H Ltd. in its books provided loss is not
compensated by future lease payment. (SP is less than WDV also FV is more than WDV)
d)Profit of Rs. 100 lakhs is to be amortized over the lease period. (Sp is more than WDV but FV is
equal to WDV)
e)Profit of Rs. 60 lakhs (460-400) to be immediately recognized in its books and balance profit of Rs. 40
lakhs (500-460) is to be amortized / deferred over lease period. (SP is more than WDV by 100 lacs but
more than FV only by 40 lacs.)
f) Loss of Rs. 50 lakhs (400-350) to be immediately recognized by H Ltd. in its books and profit of Rs. 40
lakhs (390-350) should be amortized / deferred over lease period. (SP is short of WDV by
10 lacs and but more than FV by 40 lacs)

Problem -14
Indian giants limited has initiated a lease for a period of three years in respect of a machine costing Rs.
6,00,000 with an expected useful life of 5 years. Under the lease agreement, the asset would revert back
to India giants limited at the end of lease period. The unguaranteed residual value [UGRV] of asset after
the lease term is estimated at Rs. 60,000. The implicit rate of interest is 10%.
rd
The present value of annuity factor of Rupee 1 due at the end of 3 year at 10% IRR is 2.24868. The PV
rd
of Rupee due at the end of 3 year at 10% rate of interest is 0.7513.
State with reasons whether the lease constitutes finance lease and also compute unearned finance
income.

Present value of unguaranteed Residual 60,000 x .7513 45,078

Value
Present value of lease Payments ( LP + 6,00,000 – 45,078 5,54,922
GRV)
Percentage of lease payments to Fair 5,54,922 / 6,00,000 x 100 92.487 % covers substantial
Value portion of Fair Value ;
therefore Finance lease
Annual lease Payments = PV of lease 5,54,922 / 2.24868
payments / P v of Annuity Factor
Gross investments = Lease Payments + (246,776 x3 = 7,40,330 )+ 8,00,330
GRV + UGRV UGRV 60,000
Less : PV of MLP + UGRV 6,00,000
Unearned finance income 2,00,330

Question – 15
Explain the types of leases

Question – 16
Welkins India limited wishes to obtain a machine costing Rs. 30 lacs by way of lease. The effective life of
the machine is 14years, but the company requires it only for the first 5 years. It enters into an agreement
with Kevins limited for a lease rental for RS. 3 lacs per annum payable in arrears and the implicit rate of
interest is 15%. The chief accountant of Welkins limited is not sure about the treatment of these rentals
and seeks your advise.
Solution –
Present value of MLP = 3,00,000 x annuity Factor @ 15% for 5 years 3.3522 = 10,05,660
Since present value of lease payments i.e. Rs. 10,05,660 does not cover the Fair value that is Rs. 30
lakhs and also lease period does not cover the major part (less than 50% of total useful life) , lease
should be classified as operating lease.

Question – 17
Saaheera Limited availed a lease from Zaaheera Limited . The conditions of the lease are as under :
Lease period is 3 years, in the beginning of the year 2011, for equipment costing Rs. 10,00,000 and has
an expected useful life of 5 years .
The property reverts back to lessor on termination of the lease
The unguaranteed residual value is estimated at Rs. 1,00,000 at the end of the year 2013
The fair market value is Rs. 10,00,000
3 equal annual payments are made at the end of each year
Consider IRR = 10%
rd
The present value of Re-1 due at the end 3 year at 10% of interest is Re. 0.7513. The present value of
rd
annuity of Re. 1 due at the end of 3 year at 10% IRR is Rs. 2.4868.
State whether the lease constitute finance lease and also calculate unearned finance income.
Solution :
Present value of unguaranteed Residual 1,00,000 x .7513 75,130
Value
Present value of lease Payments ( LP + 10,00,000 – 75,130 9,24,870
GRV)
Percentage of lease payments to Fair 9,24,870 / 10,00,000 x 100 92.487 % covers
Value substantial portion of Fair
Value ; therefore Finance
lease
Annual lease Payments = PV of lease 9,24,870 / 2.4868 3,71,912
payments / P v of Annuity Factor
Gross investments = (Lease Payments + (371,912 x3 = 11,15,736 )+ 12,15,736
GRV) + UGRV UGRV 1,00,000
Less : PV of MLP + UGRV 10,00,000
Unearned finance income 2,15,736

Question -18
Triple 999 limited has taken a machinery on lease from Dunhill limited . The information is as under ;
 Lease term = 4 years
 Fair value at inception of lease = Rs. 20,00,000
 Lease rent = Rs. 6,25,000 p.a. at the end of the year
 Guaranteed Residual value = Rs. 1,25,000
 Expected Residual value = 3,75,000
 Implicit interest rate = 15%
 Discounted rates for 1,2,3,and 4th year .8696, .7561, .6575, and .5718 respectively.
Calculate the value of liability
Solution:
PV of MLP = 6,25,000 x .8696 + 625,000 x .7561 + 6,25,000 x .6575 + 6,25,000 x .5718 +125,000 x
.5718 =18,55,850
PV of MLP Rs. 18,55,850 is less than FV at the inception of lease Rs. 20,00,000 therefore lease liability
should be recognised at Rs. 18,55,850
 Question –19
Equipment having expected useful life of 5 years, is leased for 3 years. Both the cost and the fair value of
the equipment are Rs. 6,00,000. The amount will be paid in 3 equal instalments and at the termination of
rd
lease, lessor will get back the equipment. The UGRV at t he end of 3 year is Rs. 60,000. IRR of the
rd
investment is 10%. The present value of annuity factor of Rs. 1 at the end of 3 year at 10% is 2.4868.
rd
The present value of Rs. I due at the end of 3 year at 10% rate of interest is 0.7513. State with reasons
whether the lease constitutes fiancé lease and also compute the unearned finance income .CA Nov. 2011
Solution :
 PV of MLP = 6,00,000 presumed equal to FV as lease rentals are not given
rd
 PV of RV at the end of 3 year = 60,000 x .7513 = 45,078
 PV of lease payments = 6,00,000 – 45,078 = 5,54,922
 The percentage of PV of lease payments to fair value is 5,54,922 / 6,00,000 x 100 = 92.487%
which covers a substantial part of lease payments therefore it is case of finance lease

Question – 20
Equipment is leased for 3 years and its useful life is 5 years. Both the cost and the fair market value of the
equipment are Rs.3,00,000. The amount will be paid in 3 instalments and at the termination of lease
lessor will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs.40,000.
The (internal rate of return) IRR of the investment is 10%. The present value of annuity factor of Re. 1
due at the end of 3rd year at 10% IRR is 2.4868. The present value of `1 due at the end of 3rd year at
10% rate of interest is 0.7513.
(i) State with reason whether the lease constitute finance lease
(ii) Calculate unearned finance income.
Solution:
As per the question, IRR of the investment is 10%
Investment in lease is Rs. 3,00,000
If IRR is 10% that means P.V. of minimum lease payment (MLP) from lessor point of view plus
unguaranteed residual value is equal to Rs. 3,00,000.
P.V. of unguaranteed residual value - (40,000 x 0.7513) = Rs. 30,052
P.V. of M.L.P. should be (3,00,000 -30,052) = Rs. 2,69,948
As at the beginning of lease period the P.V. of M.L.P cover substantially the initial fair value i.e.,
2,69,948/3,00,000 = 90% approx.
Moreover lease period covers major part of the lease of the asset
Hence, it is a finance lease.
Calculation of annual lease payment to the lessor = 2,69,948/2.4868 = Rs.1,08,552
Gross investment in lease = 1,08,552 x 3 = Rs. 3,25,657
Unguaranteed residual value = Rs. 40,000
Rs. 3,65,657
Less: P.V. of Gross investment in lease 3,00,000
Unearned finance income 65,657
 Question -21
A Ltd. leased machinery to B Ltd. on the following terms:
(Rs. in lakhs)
Fair value of the machinery 20.00
Lease term 5 years
Lease Rental per annum 5.00
Guaranteed Residual value 1.00
Expected Residual value 2.00
Expected Rate of Return 15%
Depreciation is provided on Straight line Method @10% per annum. Ascertain unearned financial income
and necessary entries may be passed in the books of the Lessee in the First year.
Solution
Calculation of present value of Minimum lease payments
Year Lease rentals in lacs Discount factor Discounted value
1 5 0.8696 4,34,800
2 5 0.7561 3,78,050
3 5 0.6575 3,28,750
4 5 0.5718 2,85,900
5 5+1=6 0.4972 2,98,320
17,25,820

Note:
It has been assumed that the lease rent is paid at the end of the year.
Present value of MLP is less than fair value of Rs. 20,00,000, so the leased asset and liability should be
recognized at Rs. 17,25,820 in the books of lessee (B Ltd)
Calculation of unearned finance income
Unearned finance income = Gross investment – PV of Gross Investment.
Year Lease rentals + GRV Discount factor Discounted value
+ UGRV „ in lacs
1 5 0.8696 4,34,800
2 5 0.7561 3,78,050
3 5 0.6575 3,28,750
4 5 0.5718 2,85,900
5 5 + 1 +1 = 7 0.4972 3,48,040
27,00,000 17,75,540

Unearned Finance Income = Rs. (27,00,000 - 17,75,540) = Rs. 9,24,460

Apportionment of MLP into finance charge and principal amount at the end of the year
:
Year Payment Finance charge Repayment Outstanding
16% of O/S amount Payment less finance
charges
0 - - 17,25,820 -
1 5,00,000 2,58,873 2,41,127 14,84,693
2 5,00,000 2,22,704 2,77,296 12,07,397
 3 5,00,000 1,81,110 3,18,890 8,88,507
4 5,00,000 1,33,276 3,66,724 521,783
6,00,000 78,267 5,21,733 -

Entries in the books of B Ltd. (lessee) in first year

Machinery (leased) A/c Dr. 17,25,820
To lease liability 17,25,820
Depreciation A/c Dr. 1,72,582
To Machinery A/c 1,72,582
Lease Liability A/c Dr. 2,41,127
(A Ltd.)
Finance Charge Dr. 2,58,873
To Bank 5,00,000
Profit & Loss A/c Dr. 4,31,455
To Depreciation A/c 1,72,582
To Finance Charges 2,58,873

Q- 22
Wit India Ltd. availed a lease from Indigo Ltd. on following terms:
 A lease for a tenor of 3 years, in the beginning of year 2011 for equipment costing Rs.7,00,000
and which has an expected useful life of 5 years. The fair market value is also Rs.7,00,000.
 3 equal annual payments are made at end of each year.
 The property reverts back to the lessor on termination of the lease.
 The unguaranteed residual value is estimated at Rs.75,000 at the end of year 2013.
 IRR = 10%.
 The present value of Re.1 due at the end of 3rd year at 10% rate of interest is 0.7513.
 The present value of annuity of Re.1 due at the end of 3rd year at 10% IRR is Rs.2.4868
(i) State with reason whether the lease constitute finance lease.
(ii) Calculate unearned finance income.
Solution:
(i) Computation of Annual payment to the lessor
PV of residual value (Rs.) = 75,000 x 0.7513 = 56,348
PV of lease payments (Rs.) = 7,00,000 – 56,348 =6,43,652
Annual payments (Rs.) = 6,43,652 /2.4868 = 2,58,817
The present value of lease payments i.e., Rs.6,43,652 equals 92% of the fair market value i.e.,
Rs.7,00,000. As the present value of minimum lease payment substantially covers the initial fair value of
the leased assets and leased term (3 years) covers the major part of the life of asset (5 years). Therefore,
it constitutes a finance lease.
(ii) Computation of unearned finance income `
Gross investment in the lease [Rs. (3 x 2,58,817) + 75,000] 8,51,451
Less: Cost of leased property 7, 00,000
Unearned finance income 1, 51,451
 Q- 23
R Ltd. (the lessee) acquired machinery on lease from S Ltd. (the Lessor) on January 1,2010. The lease
term covers the entire economic life of the machinery i.e. 3 years. The fair value of the machinery on
January 1,2010 is Rs.3,50,000. The lease agreement requires the lessee to pay an amount of
Rs.1,50,000 per year beginning on December 31,2010. The lessee has guaranteed a residual value of
Rs. 11,400 on December 31,2012 to the lessor. The lessor however estimates that the machinery will
have a salvage value of only Rs. 10,000 on December 31,2012. The implicit rate of interest is 15% p.a.
Compute the value of machinery to be recognized by the lessee and also the finance charges every year
on the basis of AS-19. PV Factor of 15% in three years is 2.283.
Solution:
As per para 11 of AS-19. At the inception of a finance lease, the lessee should recognize the lease as an
asset and a liability. Such recognition should be at an amount equal to the fair value of the leased asset
at the inception of lease. However, if the fair value of leased asset exceeds the present value of minimum
lease payments from the standpoint of the lessee, the amount recorded, as an asset and liability should
be the present value of minimum lease payments from the standpoint of the lessee. In this case fair value
of the machinery is `3,50,000 and the net present value of minimum lease payment from the minimum
lease payment is not less than the fair value, then the machinery will be recognized by the lessee at Rs.
3,50,000.
Present value of minimum lease payment:
Annual lease rental X P.V Factor + Present value of Guaranteed residual value
= Rs.1,50,000 X (0.8695 +0.7561 +0.6575) +11,400 X 0.6575
=Rs. (3,42,465 +7,496) = Payment Rs. 3,49,961. Rounded off to Rs. 3,50,000
Apportionment of MLP into finance charge and principal amount at the end of the year
:
Year Payment Finance Repayment Outstanding
charge Payment less finance
% of O/S charges
amount
0 - - 3,50,000
1 1,50,000 52,500 97,500 2,52,500
2 1,50,000 37,875 1,12,125 1,40,375
3 1,50,000 21,056 1,28,944 11,431