Lease accounting: finance lease accounting: finance lessees: example 1: allocating the 'interest element' and the 'capital element'
In this example the Rule of 78 is likely to be acceptable as a method of splitting the rentals.
Whilst most lessees may have access to computer programs that allow the actuarial method to be used, it is easier to see the underlying principles using this method and so this is used in this example
Using this method to allocate the interest element of the rent (£12,000) between each year, assuming that the lease years and accounting years are coterminous:
|Year 1||5/15ths* of £12,000||£4,000|
|Year 2||4/15ths of £12,000||£3,200|
|Year 3||3/15ths of £12,000||£2,400|
|Year 4||2/15ths of £12,000||£1,600|
|Year 5||1/15th of £12,000||£ 800|
- 5 + 4 + 3 + 2 + 1 = 15
It is then easy to determine how the rental payments in each of these five years are apportioned as the capital element of the rental is the rental less the interest element:
|Year||Rent (£) less||Interest element (£)||= capital element (£)|