BLM15635 - Lease accounting: finance lease accounting: finance lessees: example 2: allocating interest element using straight-line method

If the straight line method was used to account for the lease in the example described at BLM15605 onwards, the position would be:

  • finance (interest) charges of £15,000 spread equally over 5 years, that is £3,000 p.a.
  • the interest charge in year 1 being £2000 lower than using Rule of 78.
Year Balance b/f (£) Interest Charge (£) Rent Paid (£) Balance c/f (£)
1 50,000 3,000 1,000 52,000
2 52,000 3,000 1,000 54,000
3 54,000 3,000 1,000 56,000
4 56,000 3,000 31,000 28,000
5 28,000 3,000 31,000 nil

Accounting entries

In Example 2, using a straight-line basis for allocating the ‘interest element’ of the rentals, 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 52,000 54,000 56,000 28,000
Accrual/Repayment 2,000 2,000 2,000 28,000 28,000
Net 52,000 54,000 56,000 28,000 Nil
Profit and Loss A/c          
Depreciation 2,500 2,500 2,500 2,500 2,500
Finance Charges 3,000 3,000 3,000 3,000 3,000