Money Limited leased a machine to Hello Limited on the following terms: (i) Fair value of the machine 24.00 (ii) Lease term 5 years (iii) Lease…

(a) As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in the lease and (b) the present value of minimum lease payments under a finance lease from the standpoint of the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. Where: (a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point of the lessor and (ii) any unguaranteed residual value accruing to the lessor. Gross investment = Minimum lease payments + Unguaranteed residual value = [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed residual value (URV) = [(₹ 4,00,000 x 5 years) +80,000] +70,000 = 21,50,000 (a) (b) Table showing present value of (i) Minimum lease payments (MLP) and (ii) Unguaranteed residual value (URV). Year MLP inclusive of URV ₹ Internal rate of return (Discount factor @ 15%) Present Value ₹ 1 4,00,000 0.8696 3,47,840 2 4,00,000 0.7561 3,02,440 3 4,00,000 0.6575 2,63,000 4 4,00,000 0.5718 2,28,720 5 4,00,000 0.4972 1,98,880 80,000 (GRV) 0.4972 39,776 20,80,000 13,80,656 (i) 70,000 (URV) 0.4972 34,804 (ii) 21,50,000 (i) + (ii) 14,15,460 (b) Unearned Finance Income (a) - (b) = 21,50,000 - 14,15,460 = 7,34,540.