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Hi There,
I found an example of finance lease in ACCA site. Pls refer to below summary:
Ex. Company enter into finance lease with 4 year UL. Annual rental $5,000 (payable in Area), PPE FV = $14,275, interest 15%Answer:
Year B/fwd Interest
(15%) Rental C/fwd
1 14,275 2,141 (5,000) 11,416
2 11,416 1,712 (5,000) 8,128*Statement of financial position extract
Non-current assetsCarrying value machine (14,275 – 3,568) 10,707
Non-current liabilities
Lease obligation 8,128
Current liabilitiesLease obligation
Capital
(11,416 – 8,128) 3,288My question is “Why do we have the Capital in the BS?”.
Thanks
Because this is the finance lease so we need to recognize the asset and corresponding liability.
In this case when the lease starts the entries are:
dt non current assets – 14.275
ct lease liability – 14.275Then, each rental paid needs to be divided between capital and interest part, and capital part decreases the lease liability.
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