Question 5 (b)
8 marks
- Time to write
- About 16 minutes
- Topic
- Leases and AS 19
- Notes
- Crux notes
Question
Question 5 (b) · 8 marksMeghna Ltd acquired machinery on lease from Surya Ltd on the following terms:
| Lease Term | 6 Years |
| Fair Value of Machinery | ₹30 lakhs |
| Annual Lease Rental at the end of each year | ₹6 lakhs |
| Guaranteed Residual Value (GRV) | ₹1.5 lakh |
| Expected Residual Value | ₹2.5 lakhs |
| Implicit Rate of Return (IRR) | 12% |
Required:
Calculate the Value of machine to be recognized by Meghna Ltd.
Calculate the Net Investment in the lease from Surya Ltd's point of view.
Calculate the Finance Income that is Unearned.
Calculate the Finance Charges in the books of the lessee for each year.
Depreciation is provided on the straight line basis @10% per annum.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Calculate…4 questions in all: answer every one.
- CalculateFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
- No present-value factors are given; they are worked out from the stated IRR.
- Item (v) gives the depreciation basis without asking for a figure; the answer shows the yearly depreciation on the machine recognised by the lessee.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 (i) Value recognised by lessee lower of FV / PV of MLP 2 marks 3 min
- 2 (ii) Net investment lessor 1 mark 2 min
- 3 (iii) Unearned finance income 1 mark 2 min
- 4 (iv) Finance-charge schedule 6 years 3 marks 5 min
- 5 (v) Depreciation 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 16 minutes for 8 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Working: present-value factors
PV factors @12% (computed from the IRR): Yr1 0.8929, Yr2 0.7972, Yr3 0.7118, Yr4 0.6355, Yr5 0.5674, Yr6 0.5066; 6-year annuity factor = 4.1114.
(i) Value of machine recognised by Meghna Ltd (lessee)
Minimum Lease Payments (lessee) = lease rentals + Guaranteed Residual Value.
| Component | ₹ |
|---|---|
| PV of rentals = 6,00,000 × 4.1114 | 24,66,844 |
| PV of GRV = 1,50,000 × 0.5066 | 75,995 |
| PV of MLP | 25,42,839 |
Value recognised = lower of Fair Value (₹30,00,000) and PV of MLP (₹25,42,839) = ₹25,42,839.
(ii) Net Investment in the lease (lessor, Surya Ltd)
Gross Investment = lease rentals + total residual value; Net Investment = PV of Gross Investment @12%. [note S4]
| Gross Investment | ₹ |
|---|---|
| Lease rentals receivable | 36,00,000 |
| Total residual value | 2,50,000 |
| Gross Investment | 38,50,000 |
| Net Investment (present value at 12%) | ₹ |
|---|---|
| PV of rentals | 24,66,844 |
| PV of total residual value: 2,50,000 × 0.5066 | 1,26,658 |
| Net Investment | 25,93,502 |
(iii) Unearned Finance Income
1 mark= Gross Investment − Net Investment = 38,50,000 − 25,93,502 = ₹12,56,498.
(iv) Finance Charges for each year (books of lessee)
Liability recognised ₹25,42,839, unwound at the implicit rate 12%; rental ₹6,00,000 paid each year-end.
| Year | Opening liability | Finance charge @12% | Rental paid | Principal repaid | Closing liability |
|---|---|---|---|---|---|
| 1 | 25,42,839 | 3,05,141 | 6,00,000 | 2,94,859 | 22,47,980 |
| 2 | 22,47,980 | 2,69,758 | 6,00,000 | 3,30,242 | 19,17,737 |
| 3 | 19,17,737 | 2,30,128 | 6,00,000 | 3,69,872 | 15,47,866 |
| 4 | 15,47,866 | 1,85,744 | 6,00,000 | 4,14,256 | 11,33,610 |
| 5 | 11,33,610 | 1,36,033 | 6,00,000 | 4,63,967 | 6,69,643 |
| 6 | 6,69,643 | 80,357 | 6,00,000 | 5,19,643 | 1,50,000 |
| Total 12,07,161 | (= GRV) |
The year-6 closing liability equals the GRV ₹1,50,000, settled via the residual: a check that the schedule ties. Total finance charge ₹12,07,161 = total MLP (₹37,50,000) − value recognised (₹25,42,839).
(v) Depreciation
1 mark@10% SLM on the recognised value ₹25,42,839 = ₹2,54,284 per annum. [note S6]
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | (i) Value recognised by lessee (lower of FV / PV of MLP) | 2 |
| 2 | (ii) Net investment (lessor) | 1 |
| 3 | (iii) Unearned finance income | 1 |
| 4 | (iv) Finance-charge schedule (6 years) | 3 |
| 5 | (v) Depreciation | 1 |
| Total | 8 |
Report a problemopens an email to admin@getkunji.com with the question ID7369-Q5balready filled in.