Finance lease condition (any one match)
1. Transfer of ownership
2. Purchase option
3. Term of lease = Economic of the asset /75% of economic life of
the asset
4. Present value of lease payments > /= Fair value of the asset
(90%)
5. Implicit rate /Interest rate which one is lower
Things to remember:
• Amount = lessee ke (pv of lease rental value)
• Present value er upor e interest, depreciation charge kore
Journal If payment made in the beginning:
Year 1
Rest yrs
ROU asset -dr.
Lease Liability -cr.
Lease Liability -Dr.
Cash- Cr.
Interest Expense-dr
Lease liablity -dr
Cash -cr
Depreciation Expense-dr
Acc. Depreciation ROU-cr
Example:
Yr
Yr 1
Particulars
ROU asset -dr.
Amount
47156
Lease Liability -cr.
Lease Liability -Dr.
47156
13610
Cash- Cr.
Interest Expense-dr
Lease liability -dr
13610
4416
5584
Cash-cr.
Year 2
Depreciation Expense-dr
Acc. Depreciation ROU-cr
10000
11864
11864
Journal If payment made in the Ending:
Year 1
Rest yrs
ROU asset -dr.
Lease Liability -cr.
Interest Expense-dr
Lease liablity -dr
Cash -cr
Depreciation Expense-dr
Acc. Depreciation ROU-cr
Example:
Year
Yr 1
Yr 2
Particulars
ROU asset -dr.
Lease Liability -cr.
Amount
73601
73601
Interest Expense-dr
Lease liablity -dr
Cash -cr
4416
5584
Depreciation Expense-dr
Acc. Depreciation ROU-cr
7360
10000
7360
Summary Steps:
1. Justify whether is Finance lease or Operating Call using conditions
2. Calculate the Present Value of lease rental payments
a. Look carefully whether the payment is made beginning or
ending
i. If payment made in beginning: 𝑃𝑣 = 𝐴 ∗
{(
1−(1+𝑖)−𝑛
𝑖
) ∗ (1 + 𝑖)}
ii. If payment made in Ending: 𝑃𝑣 = 𝐴 ∗ {(
1−(1+𝑖)−𝑛
𝑖
)}
3. Always calculate depreciation, interest expense on Present Value
4. Make a schedule for Cash, Interest Expenses, Reduction In lease
liability, liability and Depreciation.
Sample Table:
Year
Cash
Interest Expense
Reduction In Liability
Liability
You may be required to make an income statement
Extract of Income Statement
Yr. Particulars
operating Expenses:
Depreciation Expense
Non-operating Expenses:
Interest Expense
Amount
Extract of Balance Sheet
Particulars
Fixed Asset
ROU Asset--Less: Accumulated Depreciation
Particulars
Current Liabilities
Lease Liability
Less: lease payments
Depreciation