Capital Leases - Impact on Financials and How They Appear i

FACT PATTERN
Annual lease payment 2,000.0
Term of Lease 3
Useful life of asset 4
Interest rate used for computing imputed interest expense 4.0%
Value of leased asset 5,550.0

WHAT THE CAPITAL LEASE FOOTNOTE WOULD LOOK LIKE EACH YEAR

Capital lease payments due in the future are as follows Opening

Year 1 2,000.0
Year 2 2,000.0
Year 3 2,000.0
Total payments 6,000.0
Total imputed interest expense 450.0
Present value of payments 5,550.0

Capital lease payments due in the future are as follows End of YR 1

Year 1 2,000.0
Year 2 2,000.0
Total payments 4,000.0
Total imputed interest expense 228.0
Present value of payments 3,772.0

Capital lease payments due in the future are as follows End of YR 2

Year 1 2,000.0
Total payments 2,000.0
Total imputed interest expense 77.0
Present value of payments 1,923.0
w They Appear in Footnotes

JOURNAL ENTRIES
Opening End of Year 1 End of Year 2
Debit Credit Debit Credit Debit
Cash 2,000.0
Value of leased asset (PP&E) 5,550.0 1,387.5

Capital lease (Liability) (5,550.0) 1,778.0 1,849.0

Retained earnings (depreciation) 1,387.5 1,387.5
Retained earnings (Interest expense) 222.0 151.0

Memo Day 1 End of YR 1 End of YR 2

Gross PP&E 5,550.0 5,550.0 5,550.0
Accumulated depreciation 0.0 (1,387.5) (2,775.0)
Net PP&E 5,550.0 4,162.5 2,775.0
Capital lease liability (EOP balance) 5,550.0 3,772.0 1,923.0
Expenses recognized on the IS 1,609.5 1,538.5

Operating leases
Had this lease been accounted for as an operating lease, there would be no balance sheet asset or liability created. Instead,
cash would be reduced by the annual lease payment and the corresponding entry would simply be rent expense in retained
Notice that while the total accumulated expenses recognized under both approaches would be identical, but the timing is diff
 End of Year 2 End of Year 3 End of Year 4
Credit Debit Credit Debit Credit
2,000.0 2,000.0
1,387.5 1,387.5 1,387.5

1,923.0 0.0
1,387.5 1,387.5
77.0

End of YR 2 End of YR 3 End of YR 4

5,550.0 5,550.0
(4,162.5) (5,550.0)
1,387.5 0.0
0.0 0.0
1,464.5 1,387.5

sset or liability created. Instead, over the term of the lease,

mply be rent expense in retained earnings.(usually in SG&A).
d be identical, but the timing is different.