LEASE PREMIUM PAYABLE FOR LEASE HOLD LAND

A Public Limited Company has entered into a Lease Agreement for usage of 4.5 Acres of Industrial Land in Industrial Park developed by a PSU for 90 years. The terms of lease is Lessee Company to Pay a Lease premium of Rs.2.50 Crores to Lessor upfront and pay an annual lease rent of Rs.450/- for 90 years. The lease premium of Rs.2.50 Crores is payable as Rs.1 Crore on the date of signing the lease by way of allotment of Equity shares of the Lessee company and balance Rs.1.50 Crores in 10 Equal Annual Instalments after an initial moratorium of 2 years.

What are the accounting entries to be passed in Lessee Company books in respect of Lease Premium amount of Rs.2.50 Crores and whether this Premium amount is to be written off in the books of Lessee company during the lease period.

Dear Friend,

Here, first following some points, we need to understand.

Pay “Lease premium of Rs.2.5 crores” to Lessor upfront. ( up to this it is clear. When we say upfront, repeat word ‘UPFRONT’, how is one allowed a ‘MORATORIAM of 2 years’? Another point, how balance is allowed to be paid in 10 equal instalments?
Upfront gives an impression of payment must be completely paid at once.

For time being, let us ignore all this and let me accept your statements literally and proceed into solution:

Your question “whether this Premium amount is to be written off in the books of Lessee company during the lease period”, drags us to focus our attention towards the concept of “Fixed Assets & deprecation.”

From your words ‘PREMIUM’, it is clear that whatever you are going to pay as ‘LEASE PREMIUM’ enables an enterprise to get “ECONOMIC BENEFITS” for coming 90-long years on the subject land. So, proportionately you need to charge the same to your statement of Profit & Loss account.

Now, when it comes to Rs.450/-, you may understand that same will be charged to the Statement of Profit & Loss.