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MTPs QUESTIONS
Q6 (April. 19)
On 1 April 2017, Jupiter ltd began to lease a property on a 20-year lease. Jupiter ltd paid a lease premium of
Rs. 30,00,000 (One Time payment) on 1 April 2017. The terms of the lease required Jupiter ltd to make annual
payments of Rs. 500,000 in arrears, the first of which was made on 31 March 2018.
On 1 April 2017 the fair values of the leasehold interests in the leased property were as follows:
– Land Rs. 30,00,000.
– Buildings Rs. 45,00,000.
There is no opportunity to extend the lease term beyond 31 March 2037. On 1 April 2017, the estimated useful
economic life of the buildings was 20 years.
The annual rate of interest implicit in finance leases can be taken to be 9·2%. The present value of 20
payments of Rs1 in arrears at a discount rate of 9·2% is Rs. 9.
Required:
Explain the accounting treatment for the above property lease in the books of Lessor.
*Solve this question from Lessor’s point of View.
SOLUTION
Statement of Profit and Loss
Rs. ’000
Operating lease rental (260)
Amortisation of asset leased on finance lease (225)
Finance cost relating to finance leases (248·4)
Balance Sheet
Rs. ’000
Property, plant and equipment 4,275
Prepaid operating lease rentals:
In non-current assets 1,080
In current assets 60
Lease liability:
In non-current liabilities (2,592·1)
In current liabilities (56·3)
Explanation and supporting calculations:
Separate decisions are made for the land and buildings elements of the lease.
1) The land lease is an operating lease because land has an indefinite useful economic life and the lease
term is 20 years.
The lease premium and annual rentals are apportioned 40% (3/7·5) to the land element.
Therefore, the premium for the land element is Rs. 12,00,000 (Rs. 30,00,000 x 40%) and the annual
rentals for the land element Rs. 200,000 (Rs. 500,000 x 40%). This makes the total lease payments
Rs. 52,00,000 (Rs. 12,00,000 + 20 x Rs. 200,000).
The rental expense for the current period is Rs. 2,60,000 (Rs. 52,00,000 x 1/20).
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