Hi, Say for example a Company takes on a lease obligation of $500,000 for 10 years, with an interest rate of 10%. The company must make 10 payments of $81,372.70 (I pulled this off the internet)
How do you calculate the payments? And what shows up on the three financial statements?
You'd have a hell of a time trying to calculate the payments (if that's your question). Normally you'd use Excel or a financial calculator for that.
With regards to the statements, it depends on whether you treat it as a capital lease (financing) or an operating lease (rent):
Operating:
B/S - Nothing I/S - Rent Expense ($87k) C/F - Included in CFO (Through Net Income)
Capital Lease:
B/S - Time 0 = Asset ($10m) | Liability ($10m) Year 1+ = Asset ($10m - Depreciation - $1m if straight-line over 10 years) | Liability ($10m - Principal Repaid to Date)
I/S - Time 0 = Nothing Year 1+ = Depreciation ($1m if straight-line over 10 years) & Interest Expense (Interest Portion of Payments - which varies annually based on paid off principal)
C/F - No difference between Operating and Capital lease.
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