4.8 Leasing Summary Calculations

The Leasing Problem, as conceived from a ceteris paribus perspective, involved just three steps.

Depreciation

The principal was calculated as $2,076. The assumed life is 15 years.

$2,076 ÷ 15 =              $138 (Depreciation Expense)

$2,076 – 138 =            $1,938 (New Asset Balance)

Amortization

The interest rate is 5%. The annual lease payment is $200.

($2,076) (0.05) =        $104 (Interest)

$200 – $104 =             $96 (Amortization)

$2,076 – 96 =              $1,980 (New Liability Balance)

Adjustment to Equity

The basic accounting equation is: A – L = E.

Therefore: ∆A – ∆L = ∆E.

Assets decreased by $138, the amount of the depreciation. Liabilities decreased by $96, the amount of amortization.

(138) – (96) = (42)

Eq _Beg. = $1,000

Less:            (42) 

Eq _End =   $958