Sargam Ltd. (the lessee) has taken machinery on lease from Dhun Ltd. (the lessor) for 13 years on annual lease payment of 50,000. The life of the…

CA Intermediate · Advanced Accounting · MTP · May 2025
Sargam Ltd. (the lessee) has taken machinery on lease from Dhun Ltd. (the lessor) for 13 years on annual lease payment of 50,000. The life of the machine is 15 years. How this lease arrangement should be classified and why:
(A) Operating lease because lease payments are being made annually and the value of asset is not available.
(B) Finance Lease because lease term is for the major part of the economic life of the asset even if title is not transferred.
(C) Operating Lease because it is not stated that the asset will transferred to lessee at the end of lease term.
(D) Finance Lease because the leased asset is of a specialized nature such that only the lessee can use it without major modifications being made.

Suggested Answer and Working Notes:

Correct Answer: Option (B)

Finance Lease because lease term is for the major part of the economic life of the asset even if title is not transferred.

Topics: Amalgamation of Companies

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