Finance Leasing Manual - FLM10.39

Example 1: accounting entries when the 'loan' is repaid

The accounting is as for a loan. When the loan has been repaid, the liability disappears from the balance sheet. But the leased asset remains in the balance sheet, even though it is still subject to the terms of the lease. The accounting entries based on Example 1 at FLM10.26 are:

Balance Sh Year 2 Year 3 Year 4 Year 5 Year 6
Assets

Leased Asset £50,000 £50,000 £50,000 £50,000 £50,000

Depreciation 5,000 7,500 10,000 12,500 15,000

Net book value 45,000 42,500 40,000 37,500 35,000

Liabilities

Lease creditor 41,600 32,400 22,400 11,600

Repayment 9,200 10,000 10,800 11,600

Net 32,400 22,400 11,600 Nil

Profit and Loss A/c

Depreciation 2,500 2,500 2,500 2,500 2,500

Finance Charge 3,200 2,400 1,600 800

When the 'loan' has been repaid, in economic terms the lessee is now the only party with a significant interest in the underlying asset, yet the lessor retains ownership. This position can give rise to 'tensions' - these are considered further at FLM12.52 onwards.