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    003 Finance-Lease-Accouting

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    caparvez25
    1. A company leases equipment for 4 years with an option to purchase at the end of year 4. 2. Under finance lease accounting, the company recognizes the lease as an asset and liability on its balance sheet at the net present value of lease payments. 3. On the income statement, the company recognizes amortization of the lease asset as an operating expense and interest on the lease liability as a non-operating expense over the lease term.

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    003 Finance-Lease-Accouting

    Uploaded by

    caparvez25
    8 views6 pages
    1. A company leases equipment for 4 years with an option to purchase at the end of year 4. 2. Under finance lease accounting, the company recognizes the lease as an asset and liability on its balance sheet at the net present value of lease payments. 3. On the income statement, the company recognizes amortization of the lease asset as an operating expense and interest on the lease liability as a non-operating expense over the lease term.

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    1. A company leases equipment for 4 years with an option to purchase at the end of year 4. 2. Under finance lease accounting, the company recognizes the lease as an asset and liability on its balance sheet at the net present value of lease payments. 3. On the income statement, the company recognizes amortization of the lease asset as an operating expense and interest on the lease liability as a non-operating expense over the lease term.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    8 views6 pages

    003 Finance-Lease-Accouting

    Uploaded by

    caparvez25
    1. A company leases equipment for 4 years with an option to purchase at the end of year 4. 2. Under finance lease accounting, the company recognizes the lease as an asset and liability on its balance sheet at the net present value of lease payments. 3. On the income statement, the company recognizes amortization of the lease asset as an operating expense and interest on the lease liability as a non-operating expense over the lease term.

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    Accounting for Financial Modeling

    Finance Lease Accounting


    Finance Lease

    Ownership of the asset transfers to the lessee by the end of the lease term

    Lessee has an option to purchase the property (and who is certain to exercise that option)

    Lease term covers essentially all of the economic life of the property

    Present value of cash lease payments is equal to the asset’s fair value

    Property is specialized and only lessee can use it without major modification
    Finance Lease Accounting

    Purpose - present lease contract as an asset acquisition with debt financing

    Recognize finance lease asset (PP&E) and liability (part of debt) on the balance sheet = NPV of
    lease payments

    Finance lease asset is amortized over the term of the lease

    Amortization = finance lease asset / lease term (straight-line basis)

    Calculate interest expense: sum of the cash lease payments – NPV of cash lease payments

    Amortization (operating expense) and interest expense (non-operating expense) appear on the
    income statement
    Example
    Period Year 1 Year 2 Year 3 Year 4
    Cash lease payments 8,600 2,000 2,100 2,200 2,300
    Discount rate 1.10 1.21 1.33 1.46
    Discounted lease payments (NPV) 6,778 1,818 1,736 1,653 1,571
    1. Suppose that a company leased equipment for 4
    years, with an option to purchase the equipment at Period Year 1 Year 2 Year 3 Year 4
    the end of year 4; Lease liability opening balance 6,778 5,455 3,901 2,091
    + interest expense 1,822 678 546 390 209
    - cash lease payment 8,600 2,000 2,100 2,200 2,300
    2. Lease payment is 2,000 in year 1, which
    Lease liability closing balance BS 5,455 3,901 2,091 -
    increases by 100 each subsequent year, the lease is
    payable at the end of each year; Period Year 1 Year 2 Year 3 Year 4
    Finance lease asset opening balance 6,778 5,083 3,389 1,694
    - Amortization 6,778 1,694 1,694 1,694 1,694
    3. The company’s borrowing rate is 10%; Finance lease asset closing balance BS 5,083 3,389 1,694 -

    Period Year 1 Year 2 Year 3 Year 4


    4. Show the impact of the lease on the income Amortization 6,778 1,694 1,694 1,694 1,694
    statement, balance sheet and cash flow statement Interest expense 1,822 678 546 390 209
    under finance lease accounting. Total IS impact IS 2,372 2,240 2,084 1,903

    Period Year 1 Year 2 Year 3 Year 4


    Cash flow from operating activities CFS 1,694 1,694 1,694 1,694
    Cash flow from financing activities CFS (1,322) (1,554) (1,810) (2,091)

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