Accounting for Lease

Lessee Accounting Lessor Accounting

Dr.\ Lease Receivable Asset recorded (At its

Cr.\ Equipment fair market value)

Annual rental payment = (Fair market value of Computation of annual

leased equipment – P.V. of Residual value if rental payment
exist) ÷ P.V. factor of annuity

Computation of leased = P.V. of the annual rental payment

asset + P.V. of guaranteed residual value (if exist)
+ P.V. of Bargain purchase price (if exist)

Leased asset recorded Dr.\ Leased equipment under capital leases

Cr.\ Lease Liability

Dr.\ Lease Liability First Payment (annuity due) Dr.\ Cash

Cr.\ Cash Cr.\ Lease Receivable

Dr.\ Interest expense End of first year accrued interest Dr.\ Interest Receivable
Cr.\ Interest payable Cr.\ Interest Revenue

Dr.\ Lease liability Second payment Dr.\ Cash

Dr.\ Interest payable Cr.\ Interest receivable
Cr.\ Cash Cr.\ Lease Receivable

Dr.\ Dep. Expense Depreciation Not recorded

Cr.\ Acc. Depreciation Calculated over the term life
Or
Over the economic life of the equipment if it
contains bargain purchase option

For calculated P.V. the lessee uses the less of:

- Its incremental borrowing rate
- Lessor implicit interest rate (if known to the lessee)