Electro Drive Ltd. is a manufacturer of specialized electric buses. The company sells these buses to transport agencies and also offers them on…

CA Final · Financial Reporting · PYQS · May 2026
Electro Drive Ltd. is a manufacturer of specialized electric buses. The company sells these buses to transport agencies and also offers them on lease. On 1 st April, 2022, Electro Drive Ltd. entered into a finance lease agreement with City Transport Corp. for a new model of electric bus. The details of the arrangement are as follows: (i) Lease Term is 4 years commencing on 1 st April, 2022. (ii) Annual Lease Rental is 18,06,560 payable annually in arrears on 31 st March each year. (iii) The bus cost Electro Drive Ltd. ₹ 45,00,000 to manufacture. (iv) The fair value of the bus at the commencement of the lease is 60,00,000. (v) Residual Value: The bus is expected to have a residual value of 4,00,000 at the end of the lease term. This residual value is unguaranteed by the lessee. (vi) Electro Drive Ltd. incurred legal and documentation charges of 25,000 to negotiate and arrange the lease. (vii) The interest rate implicit in the lease is 10%. (viii)Present value factors at 10% for: Year Year 1 0.909 Year 2 0.826 Year 3 0.751 Year 4 0.683 (ix) The present value of annuity of 1 for 4 years @ 10% is 3.170 You are required to account for this transaction in the books of Electro Drive Ltd. (Lessor) by calculating the Revenue, Cost of Sales and Selling Profit. Also, provide the Lease Amortization Schedule for the entire lease period assuming that the lessor classifies the lease as a finance lease.

Suggested Answer and Working Notes:

(a) (i) Cost of sales = Cost to the lessor + Initial direct costs - Present value of the unguaranteed residual value = ₹ 45,00,000 + 25,000 - 2,73,200 (i.e. ₹ 4,00,000 x 0.683) = ₹ 42,51,800. (ii) Revenue = Lower of (a) Fair Value of assets i.e. ₹ 60,00,000; and (b) Present value of the lease payments receivable = 18,06,560 x 3.170 = ₹ 57,26,795 say - 57,26,800 Revenue = ₹ 57,26,800 (iii) Selling Profit = Revenue - Cost of sale = ₹ 57,26,800 - 42,51,800 = ₹ 14,75,000 (iv) Net Investment in lease = Present value of the lease payments receivable + Present value of the unguaranteed residual value = ₹ 57,26,800 + 2,73,200 = ₹ 60,00,000 (v) Amortisation Schedule Year Lease receivable at the beginning of year (₹ ) (a) Lease payments (₹ ) (b) Interest Income (10% per annum) (₹ ) (c) Decrease In lease receivable (₹ ) (d) = (b)-(c) Lease receivable at the end of year (₹ ) (e) = (a)-(d) 1 60,00,000 18,06,560 6,00,000 12,06,560 47,93,440 2 47,93,440 18,06,560 4,79,344 13,27,216 34,66,224 3 34,66,224 18,06,560 3,46,622 14,59,938 20,06,286 4 20,06,286 18,06,560 2,00,274* 16,06,286 4,00,000 *Difference of 355 (₹ 2,00,629- 2,00,274) is due to approximation. (v) Accounting of lease transactions in the books of Electro Drive Ltd. (lessor) Year ₹ ₹ 1.4.2022 Lease receivable A/c Dr. 60,00,000 Cost of sales A/c Dr. 42,51,800 To Inventory A/c 45,00,000 To Revenue A/c 57,26,800 To Creditors/Cash A/c 25,000 (Recording of lease transaction at the inception) 31.3.2023 Cash/Bank Dr. 18,06,560 To Lease receivable 12,06,560 To Interest income 6,00,000 (Being interest income accrued at the end of the year) 31.3.2024 Cash/Bank Dr. 18,06,560 To Lease receivable 13,27,216 To Interest income 4,79,344 (Being interest income accrued at the end of the year) 31.3.2025 Cash/Bank Dr. 18,06,560 To Lease receivable 14,59,938 To Interest income 3,46,622 (Being interest income accrued at the end of the year) 31.3.2026 Cash/Bank Dr. 18,06,560 To Lease receivable 16,06,286 To Interest income 2,00,274 (Being interest income accrued at the end of the year) 31.3.2026 Inventory Dr. 4,00,000 To Lease receivable 4,00,000 (On return of leased electric bus by the lessee)

Topics: Ind AS 116, General

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