How to prepare lease account?

Solution

The solution is explained below −

Using the annuity table

Rate for 4% for 10 years will be 0.130

• Annual depreciation charge = 200000 * 0.130 => 26000

Lease account

Debit sideCredit side
Year

Year

1To cash
To interest
200000
8000
192000
1By Depreciation
By Balance c/d
26000
166000
192000
2To balance b/d
To interest
166000
6640
159360
2To Depreciation
To balance c/d
26000
133360
159360
3To balance b/d
To interest
133360
5334
128026
3To Depreciation
To balance c/d
26000
102026
128026
4To balance b/d
To interest
102026
4081
97945
4To Depreciation
To balance c/d
26000
71945
97945
5To balance b/d
To interest
71945
2878
69067
5To Depreciation
To balance c/d
26000
43067
69067
6To balance b/d43067

Year 1

• Debit side: Cash – interest => 200000 – (200000*4%) => 200000 – 8000 => 192000
• Credit side: 192000 – Depreciation amount => 192000 – 26000 => 166000

Year 2

• Debit side: balance – interest => 166000 – (166000*4%) => 166000 – 6640 => 159360
• Credit side: 192000 – Depreciation amount => 159360 – 26000 => 133360

Year 3

• Debit side: Cash – interest => 133360 – (133360*4%) => 133360 – 5334 => 128026
• Credit side: 192000 – Depreciation amount => 128026 – 26000 => 102026

Year 4

• Debit side: Cash – interest => 102026 – (102026*4%) => 102026 – 4081 => 97945
• Credit side: 192000 – Depreciation amount => 97945 – 26000 => 71945

Year 5

• Debit side: Cash – interest => 97945 – (97945*4%) => 97945 – 2878 => 69067
• Credit side: 192000 – Depreciation amount => 69067 – 26000 => 43067

Updated on: 29-Sep-2020

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