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Could you please tell me the journal entries when we make the monthly lease payments in advance? Also let me know the journal that takes place when the interest become due?
Whether They are in advance or in arrears, the doble entry is the same!
Dr f l creditor with the capital element of each instalment
Dr f l interest with the interest element
Cr cash with the full instalmentThe problem is in calculating how much interest in included within each instalment!
In first month , it is advance payment so there will be no interest..
FL Obligation Dr
Cash CrAgreed – question asks for journal ENTRIES in advance – with the exception of the first, my answer is correct, and the question led me to assume we were not talking about the first instalment 🙂
After the end of first period, we incur an interest expense. What is the journal for that?
Dr Interest Exp
Cr Interest payable OR Cr Lease payableThis is where Kaplan makes me confused. It shows that this interest is added to the capital amount carried forward. And, it shows that current lease liability is the full payment amount due beginning of next year. Why is that?
Secondly, When we make the payment at the beginning of the next year, what is the capital portion of the payment? Is it the balancing figure after deducting the interest accrued last year or the interest that is to be accrued at the end of the current year?
The idea behind this is that the first installment is a pure capital repayment installment. If the dates are in line with the year end then interest for the first year would not yet have been paid as the second installment would most likely be on the first day of the new financial year (in the exam anyway). Therefore liabilities would be the remaining capital repayments plus the interest accrued.
Hence
Cr Current liabilities with the next installment – split this out between the interest payable (from last year) and the capital repayment.
Cr Non Current liabilities with remaining capital repayments
Dr bank
Dr Income statement with the finance chargeIf you need a table to better understand this please let me know. Its not the easiest thing to get to grips with.
What’s the Dr bank entry? Have we persuaded the lessor to pay us for the honour of using his / her assets?
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