Introduction: Lease accounting: Finance lessor’s income
A finance lessor’s interest earnings each year are generally found by attributing the total ‘interest’ receivable over the whole period of the lease to each period of account proportionately to the capital outstanding in each period. This produces a declining amount of net profit each year where the rentals are structured like a repayment mortgage. This is because the ‘loan’ owed by the lessee at the outset gradually reduces. Hence the high loan figure in the early years allocates proportionately more ‘interest’ earnings to those years and vice versa for the later years.