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Leasing
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A company leases a fixed asset under the following terms:Solution:
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Estimated useful life (in years)6
(1) This is a finance lease - the estimated useful life of the fixed asset is 6 years, and the company leases the asset for 6 years.
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Lease period (in years)6
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Once the lease period ends the asset will be returned back to the lessor
In terms of Accounting:
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Annual rent for the fixed asset ($) 40,000
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Residual value at the end of the leasing term ($)0
(2) Recognize the asset and corresponding liabilities in the Balance Sheet
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Fair value of the fixed asset ($) 200,000 Fixed assetsLeasing liabilities
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Interest payment per year3.5% 200,000 200,000
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What is the right way to account for this lease? How is accounting going to look like at the end of year 1?
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(3) Calculate annual D&A
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Annual D&A: 33,333
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(4) Register D&A
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D&AAccumul. D&A
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 33,333 33,333
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(5) Leasing calculations
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YearStartingInterest (3.5%)RentEnding
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1 200,000 7,000 40,000 167,000
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2 167,000 5,845 40,000 132,845
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(6) Account for interest expenses
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Interest expensesLeasing liabilities
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 7,000 7,000
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(7) Balance sheet entries
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Carrying value at the end of year 1 - 200000-40000+7000=167,000
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Lease liability at the end of year 1 - 167,000
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