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

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