Example of Finance Lease Depreciation

Example of Finance Lease Depreciation

The finance lease is depreciated like other non Current assets (Fixed assets). The finance leased asset is depreciated shorter of useful life and lease term. The depreciation is debited to the income statement (profit & loss account) and asset or accumulated depreciation is credited.

Example of Finance Lease Depreciation

Plant Lease on 01 Jan 2014	60,000
Lease term	5 years
Useful life	6 Year
Depreciation for 2014 , 2015	?

Solution

Leased asset are depreciated shorter of useful life and lease term. In this example the lease term 5 years while the useful life is 6 years, therefore the asset will be depreciated over the period of 5 year.

1. Calculation of Depreciation

Depreciation Rate = Cost/lease term

Formula	Cost/Lease term
Put values in  formula	= 60,000/5 Years
Depreciation Rate	=12,000

2.  Journal Entry for Depreciation

Date	Particulars	Dr.	Cr.
31 Dec,2014	Depreciation	12,000
31 Dec,2014	Accumulated Depreciation		12,000
31 Dec,2015	Depreciation	12,000
31 Dec,2015	Accumulated Depreciation		12,000