CFA CFA Level 1 L1 Capital Lease Balance Sheet Question

L1 Capital Lease Balance Sheet Question

  • This topic has 1 reply, 1 voice, and was last updated Mar-18 by mvibs.
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    • mvibs
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      Can you please explain the balance sheet transactions for the lessee:
       1) Asset and lease liability created at PV of lease payments

       2) Asset is depreciated, accumulated depreciation is created (these balance)

       3) Cash is credited by amount of lease payment.

       4) Lease liability is reduced by amount of principal.

       5) What is created to balance the interest portion of the payment in cash?

       If lease payment is 10,000 and 8,000 is principle, lease liability is reduced by 8,000 – is the remaining 2,000 of interest expense on the asset side of the balance sheet or is it created on the liability side as a contra account? I’m thinking it can’t increase the liabilities side because asset side (cash) dropped by 10,000 (full lease payment) 

      Interest Expense is what I think it would be, but I’m not sure how that is recorded: Asset Side or Liability Side? If on liability side, is it actually positive like a contra account? So the liability side would show a lease liability that started at say 32,000 and dropped to 24,000 (8,000 principal) and Interest Expense would show up as a positive on the liability side going from 0 to -2,000? (assuming PMT was 10,000 and 2,000 was interest expense) 

      Thanks

    • mvibs
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      Figured it out thanks. 

      Interest expense needs to reduce shareholder equity, so while it’s on the other side of the bs, liabilities would not get affected by interest. 

      A = L + E
      10000 credit to cash, 8,000 debit to lease liability and 2,000 debit from shareholders equity as a result of lower retained earnings. 

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