Analyse the above arrangements and determine the appropriate classification of lease in case of Manufacturing Equipment and Specialised…
CA Intermediate · Auditing and Ethics · PYQS · May 2026
Analyse the above arrangements and determine the appropriate classification of lease in case of Manufacturing Equipment and Specialised Manufacturing Equipment.
Suggested Answer and Working Notes:
In case of Manufacturing Equipment, Lease is classified as Operating Lease due to following reasons: Lease term extends to less than 75% of the projected useful life of the leased asset. In the given case, estimated economic life is 10 years and lease period is 5 years which is significantly less than 75%.Lessee pays only the monthly lease payments. Insurance and major maintenance are borne by lessor. In case of Specialised Manufacturing Equipment, Lease is classified as Finance Lease, due to following reasons: Lease term is equal to estimated economic life of the asset under the lease arrangement.Lessee bears insurance and major maintenance.
Topics: Special Features of Audit of Different type of Entities
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