From the course: Accounting Foundations: Leases
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Simple numerical example of the new lease accounting rules
From the course: Accounting Foundations: Leases
Simple numerical example of the new lease accounting rules
- Let's do a simple numerical example using a hypothetical company to illustrate how the new lease accounting rules work. Kylie Company has leased a store location under a 20-year non-cancel level agreement. The annual lease payment is $11,746. If Kylie had purchased the store location, the cash price would have been $100,000. If Kylie had borrowed the $100,000 to purchase the store, the interest rate on the loan would have been 10%, and the annual loan payment would have been $11,746. Now note in this example the lease payment and the loan payment are the same. This is not necessarily always going to be the case. This depends on the length of the lease relative to the useful life of a leased asset, the borrowing capacity of the company signing the lease, market conditions for the leasing company and so forth. Now where does that 10% interest rate come from? One of two places. First, the leasing company, the company that legally owns the store location and that…
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