Question

In: Accounting

which accounts are affected by the entry to record a lease that is classified as a...

which accounts are affected by the entry to record a lease that is classified as a capital lease? Discuss the original entry to record the lease on the books of the lessee.

Expert Solution

A Capital lease is a type of lease where all the rights related to the asset are transferred to the LESSEE

Under a capital lease

1.The asset will be recorded by the LESSEE in his books as a fixed asset and it's depreciation also claimed by the lessee over the term of the lease agreement.

2.The Lease payments are divided into principal and interest payments. Principal amount will be reduced from loan and interests will be charged to profit and loss account.

Following are the accounts that will be effected

1.Income statement

a) interest expenses and depreciation expense

2. Cash flow statement : Interest portion will be reduced from cash flow from operations and principal portion will be reduced from cash flow from financing activities.

3.Balance sheet : Asset will be recorded as a Fixed asset and against that a loan will be recorded for lease liability.

Machinery A/c Dr.

Lease liability A/c ( for recording the leased asset)

Lease rent expenses A/c Dr.

Cash A/c (Due entry lease rentals)

Depreciation expense A/c Dr

Machinery A/c ( charging of depreciation)

Lease rent expenses A/c Dr

Interest expenses A/c Dr

Cash A/c (on payment of lease rentals)

ekkarill92 answered 1 year ago

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