Example of Finance Lease with Advance Payment

Example of Finance Lease with Advance Payment

There are two types of payment method i.e advance lease payment and payment in arrears (at the end of year). The interest calculated differently in that method. In case of advance payment the interest is calculated at the amount outstanding at the beginning of year and in case of arrears payment interest is calculated at the outstanding balance of liability at year end.

	Payment method	Interest Calculated
Lease payment	Advance	Outstanding liability at the begging of year
Lease Payment	Arrear (at year end)	Outstanding liability Balance at end of year

Example of Lease payment in Advance

Specialized Plant Leased with fair value 1.1.2014	120,000
Lease Term	3 Year
Lease Payment in advance	45,000
Interest Rate	14%
Calculate the effect on financial statement	2014, 2015

Solution

Liability Table

 In First Step lease payment in advance deducted from the fair value of asset to calculate find out the liability at the begging against which interest would be calculated. This liability is show in column D and calculated D= column B - Column C

 In Second Step interest is calculated based on the liability shown in column D i.e. outstanding liability after deducting the advance Lease payment.

In Third Step Principal Portion amount is calculated by deducting interest amount from the lease payment. (It is important to know that lease payment is consist of Interest and capital amount)

In Fourth Step principal amount is deducted from the opening liability (it is important to remember that principal amount is deducted from the liability at beginning and not from the liability find out for the purpose of calculating interest).

Year A	Liability (Beginning)      B	Lease Payment    C	Liability for interest D =B -C	Interest Amount     E	Principal Amount      F	Liability Year end     G
1	120,000	45,000	75,000	9750	35,250	84,750
2	84,750	45,000	39,750	5,167	39,832	44,918
3	44,918	44,918	0			-

2. Statement of Financial Position

Asset Held under Finance Lease

	2015	2014
Asset Held under Finance Lease	120,000	120,000
Depreciation	40,000	80,000
Carrying Amount	80,000	40,000

Liability Finance Lease

	2015	2014
Liability under Finance Lease	84,750	44,918

3. Income Statement (Profit and Loss account)

	2014	2015
Depreciation	40,000	40,000
Interest	9,750	5,167