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Capital Lease

What would be the correct way to account for the following capital lease?

Capital cost of vehicle say £100000

Monthly Repayments say £1865 over 60 months

We would capitalise the vehicle at 100k and the create a liability under finance leaseof £111900, where does the balance go?

Thanks for any help.

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By DMGbus
16th Feb 2012 08:49

Interest suspense account

With a fixed interest hire purchase, loan or finance lease the excess of payments over cash price represents finance charges to be spread over the period of the borrowing.

So an interest suspense account with a debit of £11,900 could be created in the example quoted, then each month a journal for interest would be made:

£ x Debit P&L interest paid

£ x Credit Interest Suspense Account

Alternatively:

£100,000 debit vehicle cost

£100,000 credit finance lease borroring

Then when repayments are made make a monthly journal for the interest included in the monthly payment,

£ x Debit P&L interest paid

£ x Credit Finance Lease liability

 

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