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 |