Finance Leasing Manual - FLM43.28

Bad debts: step rentals: example

Consider a ten year lease with step rentals. The capital amount is £50,000 and the implied interest rate 10%. But the rent in year 1 is £2000, year 2 £2,500 and so on. The position then might be as here.

If the lessee defaults in the fourth year, the bad debt written off will include part of the finance charge shown as income for accounting purposes in years one, two, and three (charges £15,880 less rent £7,500 = £8,380; the amount by which the loan balance exceeds the original 'advance'). Again the bad debt writen off has two constituent parts. If no other rental income is received then to the extent that the finance charges have been taxed (for example under Schedule 12 Finance Act 1997) but the rent not received, a bad debt deduction is due.