BLM15520 - Lease accounting: finance lease accounting: finance lessees: example 1: allocating the 'interest element' and the 'capital element'

The example is very simple but even then a lessee will have to have access to computer programs, although excel can be used for this simple example, that allow the effective interest rate method to be used to calculate the interest and capital element of the annual rentals.

Using the effective interest method an effective interest rate of 7.63% can be calculated and this results in a split between the capital element and interest element as shown in the table below.

Year	Rent (£) less	Interest element (£)	= capital element (£)
1	12,400	3,814	8,586
2	12,400	3,159	9,241
3	12,400	2,454	9,946
4	12,400	1,695	10,705
5	12,400	878	11,522