J Limited availed an equipment on lease from K Limited. The conditions of the lease terms are as under: (i) Lease starts from 1st April, 2020 for a…
CA Intermediate · Advanced Accounting · PYQS · January 2025
J Limited availed an equipment on lease from K Limited. The conditions of the lease terms are as under: (i) Lease starts from 1st April, 2020 for a period of 4 Years and useful life of the equipment is 6 years. Both the cost and fair value of equipment are - 12,50,000. (ii) The equipment reverts back to the lessor on termination of the lease. (iii) The unguaranteed residual value is estimated at 1,20,000 at the end of the financial year 2023-2024. (iv) The amount will be paid in 4 equal instalments at the end of each year. (v) Consider IRR = 8%. (vi) The present value of 1at the end of 4th year at 8% of interest is 0.735. (vii) The present value of annuity of 1 due at the end of 4th year at 8% IRR is 3.312 State whether this lease is operating lease or Finance lease (by applying two deterministic parameters). Also calculate unearned finance Income.
Suggested Answer and Working Notes:
Computation of annual lease payment: Particulars ₹ Cost of equipment 12,50,000.00 Unguaranteed residual value 1,20,000.00 Present value of unguaranteed residual value (1,20,000 x 0.735) 88,200.00 Present value of lease payments (12,50,000 -88,200) 11,61,800.00 Present value of annuity for four years is 3.312 Annual lease payment [11,61,800/3.312] 3,50,785.02 Classification of lease: Parameter 1: The present value of the lease payment i.e.11,61,800 which equals 92.94% of the fair market value i.e.12,50,000. The present value of minimum lease payments substantially covers the fair value of the leased asset. Parameter 2: The lease term (i.e. 4 years) covers the major part of the life of asset (i.e. 6 years). Therefore, it constitutes a finance lease. Computation of Unearned Finance Income: Particulars ₹ Total lease payments (₹ 3,50,785.02 x 4) 14,03,140.08 Add: Unguaranteed residual value 1,20,000.00 Gross investment in the lease 15,23,140.08 Less: Present value of lease payments and residual value i.e. Net Investment (88,200 +11,61,800) (12,50,000.00) Unearned finance income 2,73,140.08
Topics: AS 19
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