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Colour Limited leased a Machine to Red Limited on 1 April, 2021 on the following: Cost of the machine 18,00,000 Lease term 3 Years Fair market value…

CA Intermediate · Advanced Accounting · MTP · January 2026

Colour Limited leased a Machine to Red Limited on 1 April, 2021 on the following: Cost of the machine 18,00,000 Lease term 3 Years Fair market value of the machine 18,00,000 Unguaranteed residual value as on 31.3.2024 2,00,000 Internal rate of return 12% Other information: The expected useful life of the machine is 5 years. The machine will revert to Colour Limited on termination of the lease. The lease payment is to be made at the end of each year in 3 equal parts. The present value of 1due at the end of 3rd year at 12% rate of interest is 0.7118. The present value of annuity of at 1 due at the end of 3rd year at 12% IRR is 2.4018. You are required to analyze whether lease constitutes finance lease. Also calculate unearned finance income, if any.

Suggested Answer and Working Notes:

Computation of Annual Lease Payment Particulars Amount Cost of Equipment 18,00,000 Unguaranteed Residual Value 2,00,000 Present Value of unguaranteed residual value (₹ 200,000 x 0.7118) 1,42,360 Present Value of Lease Payments (₹ 18,00,000 - 1,42,360) 16,57,640 Present Value of Annuity for three years is 2.4018 Annual Lease Payment (16,57,640 / 2.4018) 6,90,165.71 Classification of Lease: Parameter 1: The present value of lease payment i.e.16,57,649 which equals 92.09% of the fair market value i.e.,18,00,000. The present value of minimum lease payments is substantially covers the fair value of the leased asset Parameter 2: The lease term (i.e. 3 years) covers the major part of the life of the asset (i.e. 5 years). Therefore, it constitutes a finance lease. Computation of unearned Finance Income: Particulars Amount Total Lease Payments (6,90,165 x 3) 20,70,495 Add: Unguaranteed residual value 2,00,000 22,70,495 Less: Present value of lease payments and residual value i.e. Net investment (1,42,360+16,57,640) 18,00,000 Unearned Finance Income 4,70,495

Topics: AS 19, AS 20

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Colour Limited leased a Machine to Red Limited on 1 April, 2021 on the following: Cost of the machine 18,00,000 Lease term 3 Years Fair market value…

Suggested Answer and Working Notes:

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