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 |