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Accounting for a finance lease has four steps: Record the present value of all lease payments as the cost of the lease. Record only the interest portion of each payment as an expense. Depreciate the recognised cost of the asset over its applicable life. Recognise the asset's disposal upon its retirement.

Lease payments refer to the payments where the lessee under the lease agreement has to pay monthly fixed rental for using the asset to the lessor being the owner of such asset, and the asset is generally taken back by the owner after the expiration of the lease term.

For example, let's say John Doe owns a house on Main Street. He does not live in the house; he decides to lease it to Jane Smith. John continues to be the owner of the house, but Jane agrees to pay John $800 a month in return for letting her live there for a year. The $800 is Jane's lease payment.

Divide the depreciation amount by the number of months in your lease. This will be your base payment. Add the adjusted capitalized cost and the residual value. Take the sum and multiply it by money factor.

The lease discount rate is determined by identifying the rate implicit in the lease. The implicit rate is the rate charged by the lessor and is usually stated in the contract. To determine the lease discount rate, lessees should use the rate implicit in the lease.

Get the free Present Value Calculator to follow along: Step 1: Create your table with headers. ... Step 2: Enter amounts in the Period and Cash columns. ... Step 3: Insert the PV function. ... Step 4: Enter the Rate, Nper Pmt, and Fv. ... Step 5: Sum the Present Value column.

Get the free Present Value Calculator to follow along: Step 1: Create your table with headers. ... Step 2: Enter amounts in the Period and Cash columns. ... Step 3: Insert the PV function. ... Step 4: Enter the Rate, Nper Pmt, and Fv. ... Step 5: Sum the Present Value column.