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Working Notes:

1. Calculating PV of lease payments, less lease incentive:
Year Lease Payment (A) Present value factor Present value of lease
@ 9.04% (B) payments (A x B=C)

Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800

Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764

Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215

Year 9 6,33,385 0.50 3,16,693
Year 10 6,52,387 0.46 3,00,098
Total 37,39,648

2. Calculating PV of purchase option at end of lease term:

Year Payment on purchase Present value factor @ Present value of purchase
option (A) 9.04% (B) option (A x B=C)
Year 10 30,00,000 0.42 12,60,000

Total 12,60,000
The discount rate for year 10 is different in the above calculations because in the earlier one its beginning of year 10 and in

the later one its end of the year 10.

Q8 (MTP May 21 – 10 Marks)

Buildings Limited entered into a 10-year lease for 6,000 square meter of office space. The annual lease payments

are Rs. 60,000 payables at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Buildings Limited's incremental borrowing rate at the commencement date is 8% p.a. At the
th
beginning of 6 year, Buildings Limited and lessor agree to amend the original lease to reduce the space to only
3,000 square meters of the original space starting from the end of the first quarter of year 6. The annual fixed
lease payments (from year 6 to year 10) are Rs. 35,000. Buildings Limited's incremental borrowing rate at the
beginning of year 6 is 6% p.a.
The CFO of the Company has requested your suggestion on how to account for the modification in the lease of

office space? Prepare the detailed working for the modification.

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