Leases Accounting for Leases- An Illustration Lease Facts A company leases an asset on January 1 2000-. it has no other assets or liabilities Estimated economic life of leased asset is 5 years with no salvage value --company will depreciate the asset on a straight-line basis over its life Lease has a fixed non-cancelable term of 5 years with annual MLPs of $2, 505 paid at the end of each year Interest rate on the lease is 8% per year
Leases Accounting for Leases – An Illustration Lease Facts • A company leases an asset on January 1, 2000 -- it has no other assets or liabilities • Estimated economic life of leased asset is 5 years with no salvage value -- company will depreciate the asset on a straight-line basis over its life • Lease has a fixed non-cancelable term of 5 years with annual MLPs of $2,505 paid at the end of each year • Interest rate on the lease is 8% per year
Leases Accounting for Leases-lustration(continued) Lease Amortization schedule Interest and Principal Year. Year Components of MLP end Year Liability Interest PrincipalTotal Liability 2000 $10,000 $800 $1,705$2,505$8,295 2001 8,295 664 1,841 2,505 6,454 2002 6,454 517 1,988 2,505 4.466 2003 4,466 358 2,147 2,505 2,319 2004 2,319 186 2.319 2.505 0 Totals $2,525 $10000912525 Straight-line depreciation $2,000 per year([$10000-$0]5 years)
Leases Accounting for Leases – Illustration (continued) Lease Amortization Schedule Straight-line depreciation $2,000 per year ([$10,000 - $0]/5 years) Year Beginning Year Liability Interest and Principal Components of MLP Yearend Liability Interest Principal Total 2000 2001 2002 2003 2004 Totals $10,000 8,295 6,454 4,466 2,319 $ 800 664 517 358 186 $2,525 $ 1,705 1,841 1,988 2,147 2,319 $10,000 $ 2,505 2,505 2,505 2,505 2,505 $12,525 $8,295 6,454 4,466 2,319 0
Leases Accounting for Leases-lllustration(continued) Income statement Effects of lease methods Ye Operating Lease Capital lease 2000 Rental Expense $2,505 Depreciation Expense $2,000 Interest Expense 800 Total Expense $2505 Total Expense $2800 2001 Rental Expense $2,505 Depreciation Expense 2000 Interest Expense 664 Total Expense $2,505 Total Expense $2,664 2002 Rental Expense $2,505 Depreciation Expense $2,000 Interest Expense 517 Total Expense $2,505 Total Expense $2,517 2003 Rental Expense $2,505 Depreciation Expense $2,000 Interest Expense 358 Total Expense $2,505 Total Expense $2,358 2004 Rental Expense $2,505 Depreciation Expense $2000 Interest Expense Total Expense $2,505 Total Expense $2,186
Leases Accounting for Leases – Illustration (continued) Year Operating Lease Capital Lease 2000 Rental Expense Total Expense $2,505 Depreciation Expense Interest Expense Total Expense $2,000 800 $2,505 $2,800 2001 Rental Expense Total Expense $2,505 Depreciation Expense Interest Expense Total Expense $2,000 664 $2,505 $2,664 2002 Rental Expense Total Expense $2,505 Depreciation Expense Interest Expense Total Expense $2,000 517 $2,505 $2,517 2003 Rental Expense Total Expense $2,505 Depreciation Expense Interest Expense Total Expense $2,000 358 $2,505 $2,358 2004 Rental Expense Total Expense $2,505 Depreciation Expense Interest Expense Total Expense $2,000 186 $2,505 $2,186 Income Statement Effects of Lease Methods Operating Lease
Leases Accounting for Leases- llustration(continued) Balance sheet Efects of Lease Methods Date Operating Leases Capital Leases Assets Liabilities Assets Jan. 1, 2000 Cash $ 0 Lease liability 10,000 Cash 0 Lease liab s Leased asset quity Leased asset 10.000 Total Total $10,000 Total 10,000 Tota Dec 31, 2000 Cash $(2, 505) Lease liability 8, 295 $(2, 505) Lease liab s0 Leased asset 0 Equity Leased asset 8.000 Equity (2, 505) Total $(2,505) Total $5495 Total $5495 Total $(2,505) Dec 31, 2001Cash s ( 5,010) Lease liability 6,454 Cash $( 5,010) Lease liab s Leased asset 0 Equity (5464) Leased asset 6.000 Equy(5,010) Total $(5,010)Total $990 Total 990 Total $(5,010) Dec 31, 2002 Cash $(7, 515) Lease liability $4,466 Cash $(7, 515) Lease liab s Leased asset (7,981) Leased asset 4.000 Equity (7, 515) Total $(7,515) Total $(3, 515)Total $(3515) Total $(7,515) Dec 31, 2003 Cash $(10.020) Lease liability!$2,319 Cash $(10,020) Lease liab s Leased asset 10,339) Leased asset 2.000 Equity(10.020) Total (10,020) Total $(8,020)Total s(8.020) Total S(10,020) Dec 31, 2004 Cash $(12, 525) Lease liability s 0 Cash $(12, 525) Lease liab s Leased asset 0 Equity (12,525) Leased asset 0 Equity (12, 525) Total$(12, 525)Total $(12,525)To $(12525) Total $(12,525)
Leases Accounting for Leases – Illustration (continued) Balance Sheet Effects of Lease Methods Assets Liabilities Assets Liabilities Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total $ 0 0 $ 0 $ (2,505) 0 $ (2,505) $ (5,010) 0 $ (5,010) $ (7,515) 0 $ (7,515) $ (10,020) 0 $ (10,020) $ (12,525) 0 $ (12,525) Lease liab Equity Total Lease liab Equity Total Lease liab Equity Total Lease liab Equity Total Lease liab Equity Total Lease liab Equity Total $ 0 0 $ 0 $ 0 (2,505) $ (2,505) $ 0 (5,010) $ (5,010) $ 0 (7,515) $ (7,515) $ 0 (10,020) $ (10,020) $ 0 (12,525) $ (12,525) Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total Cash Leased asset Total $ 0 10,000 $ 10,000 $ (2,505) 8,000 $ 5,495 $ (5,010) 6,000 $ 990 $ (7,515) 4,000 $ (3,515) $ (10,020) 2,000 $ (8,020) $ (12,525) 0 $ (12,525) Lease liability Equity Total Lease liability Equity Total Lease liability Equity Total Lease liability Equity Total Lease liability Equity Total Lease liability Equity Total $ 10,000 0 $ 10,000 $ 8,295 (2,800) $ 5,495 $ 6,454 (5,464) $ 990 $ 4,466 (7,981) $ (3,515) $ 2,319 (10,339) $ (8,020) $ 0 (12,525) $ (12,525) Date Operating Leases Capital Leases Jan. 1, 2000 Dec 31, 2000 Dec 31, 2001 Dec 31, 2002 Dec 31, 2003 Dec 31, 2004
Leases Accounting for Leases-lllustration(continued) Im plicit Depreciation under capital and operating leases 山2100 t Capital 190 Operati 2001 2003 Year
Leases Accounting for Leases – Illustration (continued) Implicit Depreciation under Capital and Operating Leases 1500 1700 1900 2100 2300 2500 2000 2001 2002 2003 2004 Year Depreciation Expense Capital Operating