Wealth Ltd. has entered into lease agreement with a lessor for a period of 5 years at the annual lease rental of ₹ 8 lakhs. There is an option at…

(i) Calculation of ROU Asset and Lease Liability: Year Lease Payments / Purchase Price PVF @10% PV of Lease payments 1 8,00,000 0.909 7,27,200 2 8,00,000 0.826 6,60,800 3 8,00,000 0.751 6,00,800 4 8,00,000 0.683 5,46,400 5 64,00,000 (8,00,000 + 56,00,000) 0.621 39,74,400 65,09,600 Entity would amortise the right-of-use asset over the useful life of the underlying asset (5 years). Annual amortisation expense would be ₹ 13,01,920 (₹ 65,09,600 / 5 years). Accordingly, ROU Asset balance at the end of Year 1 is ₹ 52,07,680 (₹ 65,09,600 - ₹ 13,01,920).(ii) Presentation at the end of Year 1: In Balance Sheet In Profit and Loss In Statement of Cash Flows ROU Asset: ₹ 52,07,680 (W.N.2) Depreciation = ₹ 13,01,920 (W.N.2) Cash flow from financing activities: Lease payment = ₹ 8,00,000 Lease Liability: ₹ 63,60,560 (W.N.1) Interest expense (Finance cost) = ₹ 6,50,960 (W.N.1) (iii) In the above part (i), it was considered that lessee was reasonably certain that he will exercise the option at the end of 5th year that's why the same has been considered in determination of lease payment. Now, lessee is exercising the option at the end of 3rd year which implies that there is change in the assessment of an option to purchase the underlying asset.The lease liability has to be remeasured on change in the assessment of exercising the option.Original lease liability is ₹ 60,16,278 (Working Note 1). Since at the end of the 3rd year, the lease has been terminated due to exercise of option to purchase the asset, the revised lease liability is the amount paid on exercising the option i.e. ₹ 56,00,000. The difference of original lease liability and revised lease liability will decrease the carrying amount of the right-of-use asset.Accordingly, the adjustment to ROU Asset would be= ₹ 60,16,278–₹ 56,00,000 = ₹4,16,278.Journal Entry Particulars (₹) (₹) Lease liability Dr. 4,16,278 To ROU Asset 4,16,278 (Adjustment of difference in original lease liability and revised lease liability to ROU Asset) PPE Dr. 21,87,562 To ROU Asset 21,87,562 (₹ 26,03,840 (Refer W.N.2) - ₹4,16,278) (ROU Asset balance transferred to PPE on exercising of lease option) Lease Liability Dr. 56,00,000 To Bank/Lease payable 56,00,000 (Extinguishment of lease liability) Working Notes:1. Calculation of outstanding Lease Liability at the end of 3rd year Year Opening balance (A) ₹ Interest @ 10% (B) ₹ Lease payments (C) ₹ Closing balance (A) + (B) - (C) ₹ 1 65,09,600 6,50,960 8,00,000 63,60,560 2 63,60,560 6,36,056 8,00,000 61,96,616 3 61,96,616 6,19,662 8,00,000 60,16,278 2. Calculation of ROU Asset balance at the end of 3rd year Year Opening balance (A) ₹ Depreciation (B) ₹ Closing balance (A-B) ₹ 1 65,09,600 13,01,920 52,07,680 2 63,60,560 13,01,920 39,05,760 3 61,96,616 13,01,920 26,03,840