Page 143 - IC26 LIFE INSURANCE FINANCE

All lease payments should then be apportioned between the finance charge and the reduction

of the outstanding liability. Finance charge should be debited to P&L A/c.

Lessor A/c Dr

P&L A/c Dr (With the amount of finance charge)

To Bank A/c (With the amount of lease payment)

The lessee as per AS-6 should depreciate the leased asset.

Accounting for Finance Lease – In the books of lessor

The lessor should recognize the transaction as sale with the cash price. If artificially low rates of

interest are quoted, profit on sale should be restricted to that which would apply if a

commercial rate of interest were charged. The cost of sale recognized at the commencement of

the lease term is the cost/carrying amount less the present value of the unguaranteed residual

value.

Accounting for Operating Lease – In the books of lessee

Lease payments (excluding costs for services such as insurance and maintenance) are

recognized as an expense in the statement of profit or loss on a straight-line basis unless

another systematic basis is more appropriate.

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