Page 18 - 6. COMPILER QB - INDAS 116
P. 18

Relating to the rights transferred to Buyer-lessor   (D - E)          6,26,880


        At the commencement date, Seller-lessee accounts for the transaction, as follows:
                         Bank / Cash A/c                        Dr.        28,00,000
                         ROU Asset A/c                          Dr.         6,20,880
                             To Building                                                13,00,000

                             To Financial Liability                                     14,94,000
                             To Gain on rights transferred                              6,26,880


        Q11. (Jan. 21 – 6 Marks)

        Coups Limited availed a machine on lease from Ferrari Limited. The terms and conditions of the lease are as
        under:
       Lease period is 3 years, machine costing Rs. 8,00,000

           -  Machine has expected useful life of 5 years.
           -  Machine reverts back to Ferrari Limited on termination of lease.
           -  The unguaranteed residual value is estimated at Rs. 50,000 at the end of 3rd year.
           -  3 equal annual installments are made at the end of each year.
           -  Implicit Interest Rate (IRP)= 10%.

           -  Present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is 0.7513.
           -  Present value of annuity of Rs. 1 due at the end 3rd year at 10% IRP is 2.4868.
        You  are  required  to  ascertain  whether  it  is  Finance  Lease  or  Operating  Lease  and  also  calculate  Unearned
        Finance Income with the relevant context to relevant Ind AS.

        SOLUTION
        It is assumed that the fair value of the machine on lease is equivalent to the cost of the machine.
         (i)  A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of

             an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and
             rewards incidental to ownership of an underlying asset.
         (ii) Computation of annual lease payment to the lessor
                                                                                              Rs.
                    Cost of equipment / fair value                                          8,00,000
                    Unguaranteed residual value                                              50,000
                    Present value of residual value after third year @ 10% (50,000 x 0.7513)   37,565
                    Fair value to be recovered from lease payments (8,00,000 – 37,565)
                    Present value of annuity for three years is 2.4868                      7,62,435
                    Annual lease payment = 7,62,435 / 2.4868
                                                                                            3,06,593


        The present value of lease payment i.e., Rs.7,62,435 is more than 95% of the fair market value i.e., Rs. 8,00,000. The
        present value of minimum lease payments substantially covers the initial fair value of the leased asset and 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.






                                                                                                        6.17
   13   14   15   16   17   18   19   20   21   22   23