4.9 Examination of the Lease Obligation over its Entire Life
The table below illustrates how the Lease Obligation (Liability) presented above would look over its entire fifteen-year life. It functions like a mortgage because it has regular annuity payments which include both interest and amortization of the principal. Building further on this same example, we continue as follows:
| ($000) | ||||
| Year | Lease Payments | Interest @ 5% | Amortization | Balance |
| 0 | 2,076 | |||
| 1 | 200 | 104 | 96 | 1,980 |
| 2 | 200 | 99 | 101 | 1,879 |
| 3 | 200 | 94 | 106 | 1,773 |
| 4 | 200 | 89 | 111 | 1,662 |
| 5 | 200 | 83 | 117 | 1,545 |
| 6 | 200 | 77 | 123 | 1,422 |
| 7 | 200 | 71 | 129 | 1,293 |
| 8 | 200 | 65 | 135 | 1,158 |
| 9 | 200 | 58 | 142 | 1,016 |
| 10 | 200 | 51 | 149 | 867 |
| 11 | 200 | 43 | 157 | 710 |
| 12 | 200 | 36 | 164 | 546 |
| 13 | 200 | 27 | 173 | 373 |
| 14 | 200 | 19 | 181 | 192 |
| 15 | 200 | 10 | 192 | 0 |
| Totals | 3,000 | 924 | $2,076 | |
As we know, the depreciation and amortization rates are unequal. As a result, the Balance Sheet will not balance since the assets and liabilities will be reduced by unequal dollar amounts. Therefore, we will need to adjust the equity account. This adjustment makes sense in terms of the basic accounting equation discussed above.
The Equity account will be adjusted each year, as noted in the table below. (Once again, please excuse rounding errors.) See the table below.
