Page 14 - 33. FR RTP NOV. 22

20X2-20X3 2 (4-year 2/4 8,00,000 4,00,000 2,00,000
vesting period)
20X3-20X4 2 (4-year 3/4 8,00,000 6,00,000 2,00,000
vesting period)

Solution 2
The cost to the lessor for providing the machinery on lease consists of the book value of the machinery (Rs.
1,00,000), plus the initial direct costs associated with entering into the lease (Rs. 2,500), less the future
income expected from disposing of the machinery at the end of the lease (the present value of the

unguaranteed residual value of Rs. 10,000 discounted @ 10.19%, being Rs. 7,470). This gives a cost of sale of
Rs. 95,030.
The lessor records the following entries at the commencement of the lease:
Rs. Rs.

Lease receivable Dr. 1,50,000
Cost of sales Dr. 95,030
To Inventory 1,00,000
To Revenue 1,42,530
To Creditors/Cash 2,500
The sales profit recognised by the lessor at the commencement of the lease is therefore Rs. 47,500 (Rs.
1,42,530 - Rs. 95,030). This is equal to the fair value of the machinery of Rs. 1,50,000, less the book value
of the machinery (Rs. 1,00,000) and the initial direct costs of entering into the lease (Rs. 2,500). Revenue is
equal to the lease receivable (Rs. 1,50,000), less the present value of the unguaranteed residual value (Rs.

7,470).
Year Lease receivable Lease Interest Income Decrease In Lease
at the payments (10.19% per lease receivable at
beginning of (Rs.) (b) annum) (Rs.) receivable the end of year
year (Rs.) (a) (c) (Rs.) (Rs.)
(d)=(b)-(c) (e)=(a)-(d)
1 1,50,000 57,500 15,285 42,215 1,07,785
2 1,07,785 57,500 10,983 46,517 61,268
3 61,268 57,500 6,232* 51,268 10,000

*Difference is due to approximation
The lessor will record the following entries:
Rs. Rs.
Year 1 Cash/Bank Dr. 57,500
To Lease receivable 42,215
To Interest income 15,285
Year 2 Cash/Bank Dr. 57,500
To Lease receivable 46,517
To Interest income 10,983

Year 3 Cash/Bank Dr. 57,500
To Lease receivable 51,268
To Interest income 6,232

33.13