CHAPTER

12
Accounting Standard 19 Leases
Question 1
S. Square Private Limited has taken machinery on finance lease from S.K. Ltd. The information is as under:
Lease term = 4 years
Fair value at inception of lease = 20,00,000 Lease rent = 6,25,000 p.a. at the end of year Guaranteed
residual value = 1,25,000 Expected residual value = 3,75,000
Implicit interest rate = 15%
Discounted rates for 1st year, 2nd year, 3rd year and 4th year are 0.8696, 0.7561,
0.6575 and 0.5718 respectively.
Calculate the value of the lease liability as per AS-19 and disclose impact of this on Balance sheet and Profit
& loss account at the end of year 1
(Source: Illustration 1, Study Material)
Answer

an amount equal to the lower of the fair value of the leased asset at the inception of the finance lease and the
present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in
the lease. Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Implicit interest rate Present value `
Payment ` (Discount rate @15%)
1 6,25,000 0.8696 5,43,500
2 6,25,000 0.7561 4,72,563
3 6,25,000 0.6575 4,10,937
4 7,50,000 0.5718 4,28,850
Total 26,25,000 18,55,850
Present value of minimum lease payments 18,55,850 is less than fair value at the inception of lease i.e.
`20,00,000, therefore, the asset and corresponding lease liability should be recognised at 18,55,850 as per
AS 19.
Question 2
Prakash Limited leased a machine to Badal Limited on the following terms:
( In lakhs)
(i) Fair value of the machine 28.3
(ii) Lease term 5 years
(iii) Lease rental per annum 8.00
(iv) Guaranteed residual value 1.60
(v) Expected residual value 3.00
(vi) Internal rate of return 15%
Discounted rates for 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718, and 0.4972 respectively.
12.2 Accounting Standard 19 Leases Chap. 12
Ascertain Unearned Finance Income.
(Source: Illustration 2, Study Material)
Answer
As per AS 19 on Leases, unearned finance income is the difference between (a) the gross investment in
the lease and (b) the present value of minimum lease payments under a finance lease from the standpoint of
the lessor; and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the
lease.
Where:
(a) Gross investment in the lease is the aggregate of (i) minimum lease payments from the stand point
of the lessor and (ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum lease payments + Unguaranteed residual value
= [Total lease rent + Guaranteed residual value (GRV)] + Unguaranteed
residual value (URV)
= [(`8,00,000 × 5 years) + `1,60,000] + `1,40,000
= `43,00,000 (a)
(b) Table showing present value of (i) Minimum lease payments (MLP) and
(ii) Unguaranteed residual value (URV).

Year MLP inclusive of Internal rate of return (Discount Present Value

URV factor @ 15%) `
`
1 8,00,000 0.8696 6,95,680
2 8,00,000 0.7561 6,04,880
3 8,00,000 0.6575 5,26,000
4 8,00,000 0.5718 4,57,440
5 8,00,000 0.4972 3,97,760
1,60,000 (GRV) 0.4972 79,552
41,60,000 27,61,312 (i)
1,40,000 (URV) 0.4972 69,608 (ii)
43,00,000 (i)+ (ii) 28,30,920 (b)
Unearned Finance Income (a) - (b) = `43,00,000 `28,30,920= `14,69,080.
Question 3
A Ltd. sold machinery having WDV of 40 lakhs to B Ltd. for 50 lakhs and the same machinery was leased
back by B Ltd. to A Ltd. The lease back is operating lease. Comment if
(a) Sale price of `50 lakhs is equal to fair value.
(b) Fair value is `60 lakhs.
(c) Fair value is `45 lakhs and sale price is `38 lakhs.
(d) Fair value is `40 lakhs and sale price is `50 lakhs.
(e) Fair value is `46 lakhs and sale price is `50 lakhs
(f) Fair value is `35 lakhs and sale price is `39 lakhs.
(Source: Illustration 3, Study Material)
Answer
Following will be the treatment in the given cases:
(a) When sales price of `50 lakhs is equal to fair value, A Ltd. should immediately recognise the profit of
`10 lakhs (i.e. 50 40) in its books.
(b) When fair value is `60 lakhs then also profit of `10 lakhs should be immediately recognised by A
Ltd.
(c) When fair value of leased machinery is `45 lakhs & sales price is `38 lakhs, then loss of `2 lakhs
(40 38) to be immediately recognised by A Ltd. in its books provided loss is not compensated by
future lease payment, otherwise defer and amortise the loss.
Chap. 12 Accounting Standard 19 Leases 12.3
(d) When fair value is `40 lakhs & sales price is `50 lakhs then, profit of `10 lakhs is to be deferred and
amortised over the lease period.
(e) When fair value is `46 lakhs & sales price is `50 lakhs, profit of `6 lakhs (46 - 40) to be immediately
recognised in its books and balance profit of `4 lakhs (50-46) is to be amortised/deferred over lease
period.
(f) When fair value is `35 lakhs & sales price is `39 lakhs, then the loss of `5 lakhs (40-35) to be
immediately recognised by A Ltd. in its books and profit of `4 lakhs (39-35) should be
amortised/deferred over lease period.
Question 4
Explain the types of lease as per AS 19.
(Source: Question 6, Study Material)
Answer
For the purpose of accounting AS 19, classifies leases into two categories as follows:
1. Finance Lease
2. Operating Lease
Finance Lease:
It is a lease, which transfers substantially all the risks and rewards incidental to ownership of an asset to the
lessee by the lessor but not the legal ownership.
As per para 8 of the standard, in following situations, the lease transactions are called Finance lease:
1. The lessee will get the ownership of leased asset at the end of the lease term.
2. The lessee has an option to buy the leased asset at the end of the lease term at price, which is
lower than its expected fair value at the date on which option will be exercised.
3. The lease term covers the major part of the life of asset even if title is not transferred.
4. At the beginning of lease term, present value of minimum lease rental covers the initial fair value.
5. The asset given on lease to lessee is of specialized nature and can only be used by the lessee
without major modification.
Operating Lease:
It is lease, which does not transfer all the risks and rewards incidental to ownership.
Question 5
Explain the accounting treatment for a sale and leaseback transaction under Operating lease.
(Source: Question 7, Study Material)
Answer
As per AS 19, where sale and leaseback results in operating lease, then the accounting treatment in different
situations is as follows:
Situation 1: Sale price = Fair Value
Profit or loss should be recognized immediately. Situation 2: Sale Price < Fair Value
Profit should be recognized immediately. The loss should also be recognized immediately except that, if the
loss is compensated by future lease payments at below market price, it should be deferred and amortized in
proportion to the lease payments over the period for which the asset is expected to be used.
Situation 3: Sale Price > Fair Value
The excess over fair value should be deferred and amortized over the period for which the asset is expected
to be used.
Question 6

(Source: Question 8, Study Material)

Answer
As per para 3 of AS 19 'Leases' the interest rate implicit in the lease is the discount rate that, at the inception
of the lease, causes the aggregate present value of:
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the leased
asset.
12.4 Accounting Standard 19 Leases Chap. 12
Question 7
What are the disclosures requirements for operating leases by the lessee as per AS-19?
(Source: Question 9, Study Material)
Answer
As per AS 19, lessees are required to make following disclosures for operating leases:
(a) the total of future minimum lease payments under non-cancelable operating leases for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to be received under non- cancelable
subleases at the balance sheet date;
(c) lease payments recognized in the statement of profit and loss for the period, with separate amounts
for minimum lease payments and contingent rents;
(d) sub-lease payments received (or receivable) recognized in the statement of profit and loss for the
period;
(e) a general description of the lessee's significant leasing arrangements including, but not limited to,
the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional
debt, and further leasing.
Question 8
Classify the following into either operating or finance lease:
(i) Lessee has option to purchase the asset at lower than fair value, at the end of lease term;
(ii) Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of
the lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and
has been procured only for use of the lessee;
(iv)
(Source: Question 10, Study Material)
Answer
(i) If it becomes certain at the inception of lease itself that the option will be exercised by the lessee, it is a
Finance Lease.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is
covered by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
Question 9
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease rentals to
yield 30% profit margin on cost 1,50,000. Economic life of the machine is 5 years and output from the
machine are estimated as 40,000 units, 50,000 units, 60,000 units, 80,000 units and 70,000 units
consecutively for 5 years. Straight line depreciation in proportion of output is considered appropriate.
Compute the following:
(i) Annual Lease Rent
(ii) Lease Rent income to be recognized in each operating year and
(iii) Depreciation for 3 years of lease.
(Source: Question 11, Study Material)
Answer
(i) Annual lease rent
Total lease rent
Output during lease period
= 130% of ` 1,50,000 ×
Total output
Chap. 12 Accounting Standard 19 Leases 12.5
= 130% of `1,50,000 x (40,000 +50,000+ 60,000)/(40,000 + 50,000 +
60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units/3,00,000 units = `97,500
Annual lease rent = `97,500 / 3 = `32,500
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognised as income in proportion of output during lease period, i.e.
in the proportion of 40 : 50 : 60.
Hence income recognised in years 1, 2 and 3 will be as: Year 1 `26,000,
Year 2 `32,500 and
Year 3 `39,000.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the depreciable amount
`1,50,000 should be allocated over useful life 5 years in proportion of output, i.e. in proportion of
40 : 50 : 60 : 80 : 70 .
Depreciation for year 1 is `20,000, year 2 = 25,000 and year 3 = 30,000.
Question 10
Lessee Ltd. took a machine on lease from Lessor Ltd., the fair value being 7,00,000.
The economic life of machine as well as the lease term is 3 years. At the end of each year Lessee Ltd. pays
3,00,000. The Lessee has guaranteed a residual value of 22,000 on expiry of the lease to the Lessor.
However, Lessor Ltd., estimates that the residual value of the machinery will be only 15,000. The implicit
rate of return is 15% p.a. and present value factors at 15% are 0.869, 0.756 and 0.657 at the end of first,
second and third years respectively.
Calculate the value of machinery to be considered by Lessee Ltd. and the finance charges in each year.
(Source: Question 12, Study Material)
Answer
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 = `6,99,054 (See working note below)
Fair value of leased asset = `7,00,000
Therefore, the recognition will be at the lower of the two i.e. 6,99,054
Working Note - Present value of minimum lease payments:
Annual lease rental × PVIF+ Present value of guaranteed residual value
= `3,00,000 × (0.869 + 0.756 + 0.657) + `22,000 × 0.657
= `6,84,600 + `14,454 = 6,99,054
Computation of finance charges:

Year Finance Payment Reduction in Outstanding

charge outstanding liability
liability
1st Year beginning 6,99,054
End of 1st year 1,04,858 3,00,000 1,95,142 5,03,912
End of 2nd year 75,587 3,00,000 2,24,413 2,79,499
End of 3rd year 41,925 3,00,000 2,58,075 21,424
Question 11
B&P Ltd. availed a lease from N&L Ltd. The conditions of the lease terms are as under:
(i) Lease period is 3 years, in the beginning of the year 2009, for equipment costing 10,00,000 and
has an expected useful life of 5 years.
12.6 Accounting Standard 19 Leases Chap. 12
(ii) The Fair market value is also 10,00,000
(iii) The property reverts back to the lessor on termination of the lease.
(iv) The unguaranteed residual value is estimated at 1,00,000 at the end of the year 2011.
(v) 3 equal annual payments are made at the end of each year.
(vi) Consider IRR = 10%.
The present value off 1 due at the end of 3rd year at 10% rate of interest is
0.7513. The present value of annuity of 1 due at the end of 3rd year at 10% IRR is 2.4868.
State whether the lease constitute finance lease and also calculate unearned finance income.
(Source: Question 13, Study Material)
Answer
Computation of annual lease payment:

Particulars `
Cost of equipment 10,00,000
Unguaranteed residual value 1,00,000
Present value of unguaranteed residual value
(`1,00,000 x 0.7513) 75,130
Present value of lease payments
(`10,00,000 - `75,130) 9,24,870
Present value of annuity for three years is 2.4868
Annual lease payment [9,24,870/2.4868] 3,71,911.70
Classification of lease:
Parameter 1:
The present value of lease payment i.e., `9,24,870 which equals 92.48% of the fair market value i.e.,
`10,00,000.
The present value of minimum lease payments substantially covers the fair value of the leased asset
Parameter 2:
The lease term (i.e. 3 years) covers the major part of the life of asset (i.e. 5 years).
Therefore, it constitutes a finance lease.
Computation of Unearned Finance Income:
Particulars `
Total lease payments (`3,71,911.70 x 3) 11,15,735
Add: Unguaranteed residual value 1,00,000
Gross investment in the lease 1,215,735
Less: Present value of lease payments and residual value i.e.
Net Investment (`75,130 + `9,24,870) (10,00,000)
Unearned finance income 2,15,735
Question 12
X Ltd. sold machinery having WDV of 300 lakhs to Y Ltd. for 400 lakhs and the same machinery was
leased back by Y Ltd. to X Ltd. The lease back arrangement is operating lease.
Give your comments in the following situations:
(i) Sale price of 400 lakhs is equal to fair value.
(ii) Fair value is 450 lakhs.
(iii) Fair value is 350 lakhs and the sale price is 250 lakhs.
(iv) Fair value is 300 lakhs and sale price is 400 lakhs.
(v) Fair value is 250 lakhs and sale price is 290 lakhs.
(Source: Question 14, Study Material)
Chap. 12 Accounting Standard 19 Leases 12.7
Answer
Accounting Treatment:
S. No. Particulars Accounting Treatment
(i) When sale price of ` X Ltd. should immediately recognize the profit of
400 lakhs is equal to fair value `100 lakhs (i.e. 400 300) in its books.
(ii) When fair value is ` Profit of `100 lakhs should be immediately recognized
450 lakhs by X Ltd.
(iii) When fair value of leased Then loss of `50 lakhs (300 250) to be immediately
machinery is `350 lakhs & sales recognized by X Ltd. in its books provided loss is not
price is `250 lakhs compensated by future lease payment.
(iv) When fair value is `300 lakhs & Then, profit of `100 lakhs is to be deferred and
sales price is `400 lakhs amortized over the lease period.
(v) When fair value is `250 lakhs & Then the loss of `50 lakhs (300-250) to be
sales price is `290 lakhs immediately recognized by X Ltd. in its books and
profit of `40 lakhs (290-250) should be amortized/
deferred over lease period.
12.8 Accounting Standard 19 Leases Chap. 12

QUESTION BANK
Question 13
State any four situations when a lease would be classified as Finance Lease.
(May, 2015, 4 Marks)
Answer
Finance Lease is a lease, which transfers substantially all the risks and rewards incidental to ownership of an asset to the
lessee by the lessor but not the legal ownership. As per AS 19, in following situations, the lease transactions would be
classified as Finance lease:
(i) The lessee will get the ownership of leased asset at the end of the lease term.
(ii) The lessee has an option to buy the leased asset at the end of the lease term at price, which is lower than its
expected fair value at the date on which option will be exercised.
(iii) The lease term covers the major part of the life of asset even if title is not transferred.
(iv) At the beginning of lease term, present value of minimum lease rental covers the initial fair value.
Question 14
Aksat International Limited has given a machinery on lease for 36 months and its useful life is 60 months. Cost & fair
market value of the machinery is `5,00,000. The amount will be paid in 3 equal annual installments and the lessee will
return the machinery to lessor at termination of lease. The unguaranteed residual value at the end of 3 years is `50,000.
IRR of investment is 10% and present value of annuity factor of `1 due at the end of 3 years at 10% IRR is 2.4868 and
present value of `1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or operating lease. If it is finance
lease, calculate unearned finance income.
(November 2015, 5 Marks)
Answer:
Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3rd year
= `50,000 x 0.7513
= `37,565
Present value of lease payments = `5,00,000 `37,565
= `4,62,435
The percentage of present value of lease payments to fair value of the equipment is
(`4,62,435/ `5,00,000) x 100 = 92.487%.
Since, lease payments substantially covers the major portion of the fair value; the lease constitutes a finance lease.
Calculation of Unearned Finance Income
Annual lease payment = `4,62,435/ 2.4868 =`1,85,956 (approx.)
Gross investment in the lease = Total minimum lease payments + unguaranteed residual value
= (`1,85,956 × 3) + `50,000
= `5,57,868 + `50,000 = `6,07,868
Unearned finance income = Gross investment - Present value of minimum lease payments
and unguaranteed residual value
= `6,07,868 `5,00,000 = `1,07,868
Question 15
WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of Fitness Equipments
costing `16,99,999.50. The annual lease payments to be made at the end of each year are structured in such a way that
the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the
equipments leased out. The unguaranteed residual value of the equipment at the expiry of the lease is estimated to be
`1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10%.
You are required to calculate the amount of the annual lease payment and the unearned finance income. Discounting
Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.
(RTP May 2018)
Answer:
(i) Computation of annual lease payment to the lessor
`
Cost of equipment 16,99,999.50
Unguaranteed residual value 1,33,500.00
Present value of residual value after third year @ 10% (`1,33,500 x 0.751) 1,00,258.50
Chap. 12 Accounting Standard 19 Leases 12.9
`
Fair value to be recovered from lease payments (`16,99,999.5 - `1,00,258.5) 15,99,741.00
Present value of annuity for three years is 2.486
Annual lease payment = `15,99,741/2.486 6,43,500.00
(ii) Computation of Unearned Finance Income
`
Total lease payments (`6,43,500 x 3) 19,30,500
Add: Unguaranteed residual value 1,33,500
Gross investment in the lease 20,64,000.00
Less: Present value of investment (lease payments and residual value)
(`1,00,258.5 + `15,99,741) (16,99,999.50)
Unearned finance income 3,64,000.50
Question 16
ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being `10,00,000. The economic life of the machine as
well as the lease term is 4 years. At the end of each year, ABC Ltd. pays `3,50,000. The lessee has guaranteed a
residual value of `50,000 on expiry of the lease to the lessor. However, XYZ Ltd. estimates that the salvage value of the
machine will be only `35,000 only. It was not practicable for the lessee to determine the interest rate implicit in the lease,
However the incremental borrowing rate of ABC Ltd. is determined at 16.4%. PV factors at 16.4% for year 1, year 2, year
3 and year 4 are 0.8591, 0.7381, 0.6341 and 0.5447 respectively. You are required to calculate the value of machinery to
be considered by ABC Ltd. and the finance charges for each year.
(MTP April 2018/2019; March 2019; October 2019 & RTP November 2018/May 2020) (5 Marks)
Answer:

lease 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.
Value of machinery
In the given case, fair value of the machinery is `10, 00,000 which is more than net present value of minimum lease
payments of `9,98,835 (Refer working Note). Hence, the machine and the corresponding liability will be recorded at value
of `9,98,835 in the books of ABC Ltd.
Calculation of finance charges for each year
Year Finance Payment Reduction in outstanding Outstanding
charge liability liability
1st year beginning - - - 9,98,835
End of 1st year 1,63,809 3,50,000 1,86,191 8,12,644
End of 2nd year 1,33,274 3,50,000 2,16,726 5,95,918
End of 3rd year 97,731 3,50,000 2,52,269 3,43,649
End of 4th year 56,358 4,00,000* 3,43,642 7**
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
3,50,000 x (0.8591+ 0.7381+ 0.6341+ 0.5447) `9,71,600
Present value of guaranteed residual value
50,000 x (0.5447) `27,235
`9,98,835
* includes guaranteed residual value of `50,000 (considered to be paid).
** it should be nil, difference of 7 due to approximations.
Question 17
Sun Limited wishes to obtain a machine costing `30 lakhs by way of lease. The effective life of the machine is 14 years,
but the company requires it only for the first 5 years. It enters into an agreement with Star Ltd., for a lease rental for `3
lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Su n Limited is not sure about
the treatment of these lease rentals and seeks your advise. You are required to explain the necessary accounting
treatment in line with AS 19. (use annuity factor at @ 15% for 3 years as 3.36)
(MTP August 2018) (5 Marks)
Answer:
he inception of the lease, the present value of
minimum lease payment amounts to at least substantially all of the fair value of leased asset. In the given case, the
12.10 Accounting Standard 19 Leases Chap. 12
implicit rate of interest is given at 15%. The present value of minimum lease payments at 15% using PV - Annuity Factor
can be computed as:
Annuity Factor (Year 1 to Year 5) 3.36 (approx.)
Present Value of minimum lease payments (`3 lakhs each year) `10.08 lakhs (approx.)
Thus present value of minimum lease payments is `10.08 lakhs and the fair value of the machine is `30 lakhs. In a
finance lease, lease term should be for the major part of the economic life of the asset even if title is not transferred.
However, in the given case, the effective useful life of the machine is 14 years while the lease is only for five years.
Therefore, lease agreement is an operating lease. Lease payments under an operating lease should be recognized as an
expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is

Question 18
Jaya Ltd. took a machine on lease from Deluxe Ltd., the fair value being `11,50,000. Economic life of the machine as well
as lease term is 4 years. At the end of each years, lessee pays `3,50,000 to lessor. Jaya Ltd. has guaranteed a residual
value of `70,000 on expiry of the lease to Deluxe Ltd., however Deluxe Ltd. estimates that residual value will be only
`25,000. The implicit rate of return is 10% p.a. and present value factors at 10% are: 0.909, 0.826, 0.751 and 0.683 at the
end of 1st, 2nd, 3rd and 4th year respectively.
Calculate the value of machinery to be considered by Jaya Ltd. and the value of the lease liability as per AS-19.
(May 2019) (5 Marks)
Answer:
Accordi
equal to the fair value of the leased asset at the inception of the finance lease. However, if the fair value of the leased
asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded
as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease.
Present value of minimum lease payments will be calculated as follows:
Year Minimum Lease Payment Internal rate of return Present value
` (Discount rate @10%) `
1 3,50,000 0.909 3,18,150
2 3,50,000 0.826 2,89,100
3 3,50,000 0.751 2,62,850
4 4,20,000 0.683 2,86,860
Total 14,70,000 11,56,960
* Minimum Lease Payment of 4th year includes guaranteed residual value amounting i.e. 3,50,000 + 70,000 =
4,20,000.
Present value of minimum lease payments `11,56,960 is more than fair value at the inception of lease i.e. `11,50,000,
therefore, the lease liability and machinery should be recognized in the books at `11,50,000 as per AS 19.
Question 19
Sun Limited wishes to obtain a machine costing `30 lakhs by way of lease. The effective life of the machine is 14 years,
but the company requires it only for the first 3 years. It enters into an agreement with Star Ltd., for a lease rental for `3
lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Suraj Limited is not sure
about the treatment of these lease rentals and seeks your advice. (use annuity factor at @ 15% for 3 years as 3.36)
(RTP November 2019)
Answer:

minimum lease payment amounts to at least substantially all of the fair value of leased asset. In the given case, the
implicit rate of interest is given at 15%. The present value of minimum lease payments at 15% using PV- Annuity Factor
can be computed as:

Annuity Factor (Year 1 to Year 3) 3.36

Present Value of minimum lease payments `10.08 lakhs (approx.)
(`3 lakhs each year)
Thus present value of minimum lease payments is `10.08 lakhs and the fair value of the machine is `30 lakhs. In a
finance lease, lease term should be for the major part of the economic life of the asset even if title is not transferred.
However, in the given case, the effective useful life of the machine is 14 years while the lease is only for three years.
Therefore, lease agreement is an operating lease. Lease payments under an operating lease should be recognized as an
expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is

In calculating the present value of the of minimum lease payments, the discount rate is the interest rate implicit in the lease.
Chap. 12 Accounting Standard 19 Leases 12.11
Question 20
Classify the following into either operating lease or finance lease with reason:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the end of lease term.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss of a lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = "X". Fair value of the asset is "Y". And X = Y.
(5) Economic life of the asset is 5 years, lease term is 2 years, but the asset is of special nature and has been
procured only for use of the lessee.
(November 2019, New Course, 5 Marks)
Answer
(i) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is covered by the
lease term.
(ii) If it becomes certain at the inception of lease itself that the option will be exercised by the lessee, it is a Finance
Lease.
(iii) It is an operating lease under which lease payments are recognized as expense in the profit and loss account of
lessee to have better matching between cost and revenue.
(iv) The lease is a finance lease if X = Y, or where X substantially equals Y.
(v) Since the asset is of special nature and has been procured only for the use of lessee, it is a finance lease.
Question 21
(a) Classify the following into either operating or finance lease:
(i) Present value (PV) of Minimum lease payment (MLP) = "X". Fair value of the asset is "Y".
(ii) Economic life of the asset is 7 years, lease term is 6.5 years, but asset is not acquired at the end of the
lease term;
(iii) Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and has been
procured only for use of the lessee .
(b) Viral Ltd. sold machinery having WDV of `40 lakhs to Saral Ltd. for `50 lakhs and the same machinery was
leased back by Saral Ltd. to Viral Ltd. The lease back is in nature of operating lease. You are required to explain
the treatment in the given cases
(i) Fair value is `45 lakhs and sale price is `38 lakhs.
(ii) Fair value is `40 lakhs and sale price is `50 lakhs.
(iii) Fair value is `46 lakhs and sale price is `50 lakhs
(RTP, November, 2020)
Answer
(a) (i) The lease is a finance lease if X = Y, or if X substantially equals Y otherwise operating.
(ii) The lease will be classified as a finance lease, since a substantial portion of the life of the asset is covered
by the lease term.
(iii) Since the asset is procured only for the use of lessee, it is a finance lease.
(b) As per AS 19, where sale and leaseback results in operating lease, then the accounting treatment in different
situations is as follows:
Situation 1: Sale price = Fair Value
Profit or loss should be recognized immediately.
Situation 2: Sale Price < Fair Value
Profit should be recognized immediately. The loss should also be recognized immediately except that, if the loss
is compensated by future lease payments at below market price, it should be deferred and amortized in
proportion to the lease payments over the period for which the asset is expected to be used.
Situation 3: Sale Price > Fair Value
The excess over fair value should be deferred and amortized over the period for which the asset is expected to
be used.
Following will be the treatment in the situations given in the question:
(i) When fair value of leased machinery is `45 lakhs & sales price is `38 lakhs, then loss of `2 lakhs (40 38)
to be immediately recognized by A Ltd. in its books provided loss is not compensated by future lease
payment.
(ii) When fair value is `40 lakhs & sales price is `50 lakhs then, profit of `10 lakhs is to be deferred and
amortized over the lease period.
(iii) When fair value is `46 lakhs & sales price is `50 lakhs, profit of `6 lakhs (46 less 40) to be immediately
recognized in its books and balance profit of `4 lakhs (50-46) is to be amortized/deferred over lease period.
Question 22
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease rentals to yield 30%
profit margin on cost `1,50,000. Economic life of the machine is 5 years and output from the machine are estimated as
40,000 units, 50,000 units, 60,000 units, 80,000 units and 70,000 units consecutively for 5 years. Straight line
depreciation in proportion of output is considered appropriate.
12.12 Accounting Standard 19 Leases Chap. 12
You are required to compute: (i) Annual Lease Rent and (ii) Lease Rent income to be recognized in each operating year.
(MTP, March, 2021) (5 marks)
Answer
(i) Annual lease rent
Total lease rent
Output during lease period
= 130% of Rs. 1,50,000 ×
Total output
= 130% of `1,50,000 x (40,000 +50,000+ 60,000)/(40,000 + 50,000 + 60,000 + 80,000 + 70,000)
= 1,95,000 x 1,50,000 units/3,00,000 units = `97,500
Annual lease rent = `97,500 / 3 = `32,500
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognized as income in proportion of output during lease period, i.e. in the proportion
of 40 : 50 : 60.
Hence income recognized in years 1, 2 and 3 will be as:
Year 1 `26,000,
Year 2 `32,500 and
Year 3 `39,000.
Question 23
You are required to give the necessary journal entry at the inception of lease to record the asset taken on finance lease in
books of lessee from the following information:
Lease period = 5 years;
Annual lease rents = `50,000 at the end of each year.
Guaranteed residual value = `25,000
Fair Value at the inception (beginning) of lease = `2,00,000
Interest rate implicit on lease is = 12.6% (Discounted rates for year 1 to 5 are .890, .790, .700, .622
and .552 respectively).
(MTP, April, 2021) (5 marks)
Answer
Present value of minimum lease payment is computed below:
Year MLP ` DF (12.6%) PV `
1 50,000 0.890 44,500
2 50,000 0.790 39,500
3 50,000 0.700 35,000
4 50,000 0.622 31,100
5 50,000 0.552 27,600
5 25,000 0.552 13,800
1,91,500
Present value of minimum lease payment = `1,91,500 Fair value of leased asset = `2,00,000
As per AS 19, on the date of inception of Lease, Lessee should show it as an asset and corresponding liability at lower of
Fair value of leased asset at the inception of the lease and present value of minimum lease payments from the standpoint
of the lessee. The accounting entry at the inception of lease to record the asset taken on finance lease in books of lessee
is suggested below:
` `
Asset A/c Dr. 1,91,500
To Lessor (Lease Liability) A/c 1,91,500
(Being recognition of finance lease as asset and liability)
Question 24
Sooraj Limited wishes to obtain a machine costing `30 lakhs by way of lease. The effective life of the machine is 14 years,
but the company requires it only for the first 3 years. It enters into an agreement with Star Ltd., for a lease rental for `3
lakhs p.a. payable in arrears and the implicit rate of interest is 15%. The chief accountant of Sooraj Limited is not sure
about the treatment of these lease rentals and seeks your advice. (use annuity factor at @ 15% for 3 years as 3.36)
(RTP, May, 2021)
Answer
se, the present value of
minimum lease payment amounts to at least substantially all of the fair value of leased asset. In the given case, the
implicit rate of interest is given at 15%. The present value of minimum lease payments at 15% using PV- Annuity Factor
can be computed as:

In calculating the present value of the of minimum lease payments, the discount rate is the interest rate implicit in the lease.
Chap. 12 Accounting Standard 19 Leases 12.13
Annuity Factor (Year 1 to Year 3) 3.36
Present Value of minimum lease payments `10.08 lakhs
(`3 lakhs each year)
Thus present value of minimum lease payments is `10.08 lakhs and the fair value of the machine is `30 lakhs. In a
finance lease, lease term should be for the major part of the economic life of the asset even if title is not transferred.
However, in the given case, the effective useful life of the machine is 14 years while the lease is only for three years.
Therefore, lease agreement is an operating lease. Lease payments under an operating lease should be recognized as an
expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is
more representative of the
Question 25
X Ltd. sold machinery having WDV of `300 lakhs to Y Ltd. for `400 lakhs and the same machinery was leased back by Y
Ltd. to X Ltd. The lease back arrangement is operating lease. Give your comments in the following situations:
(i) Sale price of `400 lakhs is equal to fair value.
(ii) Fair value is `450 lakhs.
(iii) Fair value is `350 lakhs and the sale price is `250 lakhs.
(iv) Fair value is `300 lakhs and sale price is `400 lakhs.
(v) Fair value is `250 lakhs and sale price is `290 lakhs.
(Suggested, January, 2021) (5 marks)
Answer
Following will be the treatment in the given cases:
(i) When sale price of `400 lakhs is equal to fair value, X Ltd. should immediately recognise the profit of `100 lakhs
(i.e. 400 300) in its books.
(ii) When fair value is `450 lakhs then also profit of `100 lakhs should be immediately recognised by X Ltd.
(iii) When fair value of leased machinery is `350 lakhs & sales price is `250 lakhs, then loss of `50 lakhs (300 250)
to be immediately recognised by X Ltd. in its books provided loss is not compensated by future lease payment.
(iv) When fair value is `300 lakhs & sales price is `400 lakhs then, profit of `100 lakhs is to be deferred and
amortised over the lease period.
(v) When fair value is `250 lakhs & sales price is `290 lakhs, then the loss of `50 lakhs (300-250) to be immediately
recognised by X Ltd. in its books and profit of `40 lakhs (290-250) should be amortised/deferred over lease
period.
Question 26
A machine was given on 3 years operating lease by a dealer of the machine for equal annual lease rentals to yield 30%
profit margin on cost of `2, 25,000. Economic life of the machine is 5 years and output from the machine is estimated as
60,000 units, 75,000 units, 90,000 units, 1,20,000 units and 1,05,000 units consecutively for I years. Straight line
depreciation in proportion of output is considered appropriate. You are required to compute the following as per AS-19.
(i) Annual Lease Rent
(ii) Lease Rent income to be recognised in each operating year and
(iii) Depreciation for 3 years of lease
(Question Paper of December 2021) (5 Marks)
Answer
(i) Annual lease rent
Total lease rent
= 130% of `2,25,000 × Output during lease period/ Total output
= 130% of `2,25,000 x (60,000 +75,000+ 90,000)/(60,000 + 75,000 + 90,000 + 1,20,000 + 1,05,000)
= 2,92,500 x 2,25,000 units/4,50,000 units = `1,46,250
Annual lease rent = `1,46,250 / 3 = `48,750
(ii) Lease rent Income to be recognized in each operating year
Total lease rent should be recognized as income in proportion of output during lease period, i.e. in the proportion of
60,000 : 75,000 : 90,000 or 4:5:6
Hence income recognized in years 1, 2 and 3 will be as:
Year 1 `39,000,
Year 2 `48,750 and
Year 3 `58,500.
(iii) Depreciation for three years of lease
Since depreciation in proportion of output is considered appropriate, the depreciable amount `2,25,000 should be
allocated over useful life 5 years in proportion of output, i.e. in proportion of 60 :75: 90 : 120 : 105 .
Depreciation for year 1 is `30,000, year 2 = 37,500 and year 3 = 45,000.
12.14 Accounting Standard 19 Leases Chap. 12
Question 27
WIN Ltd. has entered into a three
costing ` 16,99,999.50. The annual lease payments to be made at the end of each year are structured in such a way that
the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the
equipments leased out. The unguaranteed residual value of the equipment at the expiry of the lease is estimated to be `
1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10%. You
are required to compute the amount of the annual lease payment and the unearned finance income. Discounting Factor at
10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.
(RTP November, 2022)
Answer
(i) Computation of annual lease payment to the lessor
`
Cost of equipment 16,99,999.50
Unguaranteed residual value 1,33,500.00
Present value of residual value after third year @ 10% (` 1,33,500 × 0.751)
1,00,258.50
Fair value to be recovered from lease payments (` 16,99,999.5 ` 1,00,258.5)
15,99,741.00
Present value of annuity for three years is 2.486
Annual lease payment = ` 15,99,741/ 2.486 6,43,500.00
(ii) Computation of Unearned Finance Income
`
Total lease payments (` 6,43,500 x 3) 19,30,500
Add: Unguaranteed residual value 1,33,500
Gross investment in the lease 20,64,000.00
Less: Present value of investment (lease payments and residual value) (`1,00,258.5+ `
15,99,741) (16,99,999.50)
Unearned finance income 3,64,000.50
Question 28
WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect of Fitness Equipments
costing ` 16,99,999.50. The annual lease payments to be made at the end of each year are structured in such a way that
the sum of the Present Values of the lease payments and that of the residual value together equal the cost of the
equipments leased out. The unguaranteed residual value of the equipment at the expiry of the lease is estimated to be `
1,33,500. The assets would revert to the lessor at the end of the lease. Given that the implicit rate of interest is 10%.
You are required to calculate the amount of the annual lease payment and the unearned finance income. Discounting
Factor at 10% for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.
(RTP May, 2023)
Answer
(i) Computation of annual lease payment to the lessor
`
Cost of equipment 16,99,999.50
Unguaranteed residual value 1,33,500.00
Present value of residual value after third year @ 10% (` 1,33,500 × 0.751)
1,00,258.50
Fair value to be recovered from lease payments (` 16,99,999.5 ` 1,00,258.5) 15,99,741.00
Present value of annuity for three years is 2.486
Annual lease payment = ` 15,99,741/ 2.486 6,43,500.00
(ii) Computation of Unearned Finance Income
`
Total lease payments (` 6,43,500 x 3) 19,30,500
Add: Unguaranteed residual value 1,33,500
Gross investment in the lease 20,64,000.00
Less: Present value of investment (lease payments and residual value) (` 1,00,258.5+ `
15,99,741) (16,99,999.50)
Unearned finance income 3,64,000.50