Advanced AccountingQuestion 5333 of 305
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9. A Machinery was giver on 3 years lease by a dealer of the machinery for equal annual lease rentals to yield 20% profit margin on cost of the machinery, which is Rs.3,00,000. Economic life of the machinery is 5 years, and estimated output from the machinery in 5 years is as follows: Year I 50,000 units Year II 60,000 units Year III 40,000 units Year IV 65,000 units ADVANCED ACCOUNTING Year V 85,000 units. Compute Annual Lease Rent.

Options

A` 30,000
B` 60,000
C` 50,000
D` 36,000
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Correct Answer

Option B` 60,000

All Options:

  • A` 30,000
  • B` 60,000
  • C` 50,000
  • D` 36,000

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Detailed Solution & Explanation

To compute the Annual Lease Rent:
1. Total expected output over 5 years is:
50,000+60,000+40,000+65,000+85,000=3,00,000 units50,000 + 60,000 + 40,000 + 65,000 + 85,000 = 3,00,000 \text{ units}2. Output during 3-year lease term = 50,000+60,000+40,000=1,50,000\displaystyle 50,000 + 60,000 + 40,000 = 1,50,000 units.
3. Proportion of asset utilized during lease term = 1,50,0003,00,000=50%\displaystyle \frac{1,50,000}{3,00,000} = 50\%.
4. Total selling price to yield 20% margin on cost (3,00,000\displaystyle `\,3,00,000):
Selling Price=3,00,000+(20%×3,00,000)=3,60,000\text{Selling Price} = `\,3,00,000 + (20\% \times `\,3,00,000) = `\,3,60,0005. Total lease rent to be recovered = 50%×3,60,000=1,80,000\displaystyle 50\% \times `\,3,60,000 = `\,1,80,000.
6. Annual Lease Rent = 1,80,0003=60,000\displaystyle \frac{`\,1,80,000}{3} = `\,60,000.
Hence, **Option B** is the correct answer.

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