Example of Finance Lease Initial Recognition

Example of Finance Lease Initial Recognition

Finance lease i.e. risk and reward has been transferred to the lessee are recorded as asset and liability in the book of lessee. The asset held under finance lease is ideally classified separately than other asset and liability should also require to be shown separately in the statement of financial position.

Date	Particulars	Dr.	Cr.
	Fixed Asset (Leased)
	Finance Liability

Example of Finance Lease asset and liability

Finance lease asset are recorded at lower of fair value and present value of minimum lease payment.

Fair value of Plant	20,0000
Lease Term	2 years
Lease rental	15,000
Rate of interest	10%

Kindly find at which amount the asset will be recorded in books of account?

Solution

Rule for recording (asset is recorded lower of fair value of asset and present value of lease rental)

There are three steps

1.       Calculate minimum lease payment

2.       Compare present value minimum lease payment and fair value

3.       Record the asset at lower of fair value and present value of minimum lease payment

1. Calculate the present value of Lease Rental (Minimum lease payment)

Year	Lease Rental	Discount Factor	Present value
Year 1	15,000	1/1.1= .9090	13,635
Year 2	15,000	1/(1.1)^2 =.826	12,390
Total Present value			26,025

2. Compare present value and fair value of asset

Present value	Fair Value	Recorded	Reason
26,025	20,000	20,0000 fair value	Whichever is lower

3. Journal entry for Initial recognition

Date	Particulars	Dr.	Cr.
	Fixed Asset (Leased)	20,000
	Finance Liability		20,000