S Limited took an equipment on lease from R Limited, the fair value being - 9,50,000/-. The economic life of the equipment as well as the lease term…

OR (a) As per para 11 of AS 19 "Leases", the lessee should recognize the lease as an asset and a liability at the inception of a finance lease. 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 the leased asset exceeds the present value of minimum lease payment 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. Computation of Value of machinery: Present value of minimum lease payment = 9,35,795 (See working note below) Fair value of leased asset = 9,50,000 Therefore, the recognition will be at the lower of the two i.e.9,35,795 Working Note - Present value of minimum lease payments: Annual lease rental × PVIF+ Present value of guaranteed residual value = 4,00,000 × (0.869 + 0.756 + 0.657) +35,000 × 0.657 = 9,12,800 +22,995 = 9,35,795 Computation of finance charges: (Amount in ₹) Year Opening Balance (A) Finance Charge @ 15% (B) Annual Payment (C) Principal Repaid (D=C-B) Closing Balance (E=A-D) 1 9,35,795 1,40,369 4,00,000 2,59,631 6,76,164 2 6,76,164 1,01,425 4,00,000 2,98,575 3,77,589 3 3,77,589 56,638 4,00,000 3,43,362 34,227* *The closing balance of 34,227 is approximately the guaranteed residual value of 35,000. The slight difference is due to rounding in the provided PV factors.