On the lease inception (start) date, the company would capitalize the finance lease onto the balance sheet based on the net present value of future minimum lease payments.
The company then needs to amortize the ROU asset. Annual amortization expense is calculated as the ROU asset divided by the lease life. So, if the ROU asset at inception date was $60,000 and the lease life is 5 years, that results in amortization expense of $12,000 per year. The journal entry would be a debit to amortization expense for $12,000 and a credit to accumulated amortization for $12,000. At the end of the lease life, the ROU asset will be fully amortized.
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What is the journal entry to record the finance lease on the lease inception date?
On the lease inception date, the company debit right of use (ROU) asset and credit lease liability for the net present value of future minimum lease payments. The visual below shows the journal entry for a lease that has a net present value of future minimum lease payments of $60,000.
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How to calculate the net present value of future minimum lease payments for finance leases?
The formula is quite simple – you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset). For example, let’s say the following information is available: The...
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Is the implicit rate or incremental borrowing rate used for finance leases?
When you calculate the net present value of future minimum lease payments, the rule is that you will always use the implicit rate if it is available. The incremental borrowing rate (IBR) is only used the implicit rate is not available.
What is the journal entry to record the finance lease on the lease inception date?
On the lease inception date, the company debit right of use (ROU) asset and credit lease liability for the net present value of future minimum lease payments. The visual below shows the journal entry for a lease that has a net present value of future minimum lease payments of $60,000.
How to calculate the net present value of future minimum lease payments for finance leases?
The formula is quite simple – you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset). For example, let’s say the following information is available: The...
Is the implicit rate or incremental borrowing rate used for finance leases?
When you calculate the net present value of future minimum lease payments, the rule is that you will always use the implicit rate if it is available. The incremental borrowing rate (IBR) is only used the implicit rate is not available.
