Capital Lease -Lessee
Initially, the lessee recognizes the asset under his property, plant and equipment. The amount that should be debited is the Lower of asset’s fair value and present value of minimum lease payments. The present value is determined by discounting minimum lease payments using interest rates implicit in the lease. Also, initial direct cost that the lessee incurs in relation to the lease is added to the cost of recognized asset. On the credit side of the entry should be lease liabilities, which is in fact, some kind of a loan. The lease liabilities should be split into current and noncurrent liabilities as some payments are made within 12 months while others are made after 12 month of the reporting date.
Subsequently, there are two things we must take care of. First, we must depreciate the lease asset over the economic life, not over the lease term because that doesn’t necessarily need to be the same. The entry is to debit depreciation expense in profit or loss and credit the accumulated depreciation account. Secondly, we need to allocate the lease liability or minimum lease payments paid to the lessor into two parts; reduction of lease liability and finance charge or interest. IAS 17 requires the finance charge to be allocated so as to produce a constant periodic rate of interest (interest rate implicit in the lease) on the remaining balance sheet liability. (Refer to appendix A for journal entries
The lessor is a finance provider, and therefore records lease receivables as the debit side of the entry. The lease receivable is the net investment in the lease, which is the total of minimum lease payments and unguaranteed residual value. Total of these two figures is gross investment in the lease and we need to discount it to present value using discount rate implicit in the lease and all this must be equal to fair value of the asset plus initial direct cost. The credit side to this