BLM15620 - Lease accounting: finance lease accounting: finance lessees: example 2: The accounting entries

Using the effective interest method for the lease in the example described at BLM15605 onwards, an effective interest of 8.35% can be calculated and this results in interest as shown in the table below:

Year	Balance b/f (£)	Interest Charge (£)	Rent Paid (£)	Balance c/f (£)
1	50,000	4,175	1,000	53,175
2	53,175	4,440	1,000	56,615
3	56,615	4,727	1,000	60,342
4	60,342	5,038	34,000	31,380
5	31,380	2,620	34,000	nil

In Example 2, the accounting entries would then be:

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	(2,500)	(5,000)	(7,500)	(10,000)	(12,500)
Net	47,500	45,000	42,500	40,000	37,500
Liabilities
Lease creditor	50,000	53,175	56,615	60,342	31,380
Accrual/Repayment	3,175	3,440	3,727	(28,962)	(31,380)
Net	53,175	56,615	60,342	31,380	Nil
Profit and Loss A/c
Depreciation	2,500	2,500	2,500	2,500	2,500
Finance Charges	4,175	4,440	4,727	5,038	2,620