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