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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Lease accounting: finance lease accounting: finance lessees: example 1: accounting entries when the 'loan' is repaid

The accounting is as for a loan. When the loan has been repaid, the liability disappears from the balance sheet. But the leased asset remains in the balance sheet, even though it is still subject to the terms of the lease. The accounting entries based on Example 1 at BLM15505 are:

Balance sheet at end Year 1 (£) Year 2 (£) Year 3 (£) Year 4 (£) Year 5 (£)
           
Assets          
Leased Asset 50,000 50,000 50,000 50,000 50,000
Depreciation (5,000) (7,500) (10,000) (12,500) (15,000)
Net book value 45,000 42,500 40,000 37,500 35,000
Liabilities          
Lease creditor 41,600 32,400 22,400 11,600  
Repayment (9,200) (10,000) (10,800) (11,600)  
Net 32,400 22,400 11,600 Nil  
Profit and Loss A/c          
Depreciation 2,500 2,500 2,500 2,500 2,500
Finance Charge 3,200 2,400 1,600 800  

When the ‘loan’ has been repaid, in economic terms the lessee is now the only party with a significant interest in the underlying asset, yet the lessor retains ownership.