What "depreciates" the liability each period in a capital lease

CFA Level II
#1

I understand that under a capital lease, the assets go down by depreciation. What is the “Contra” rate that causes the liability to go down to make sure the liability portion stays in line with the asset portion as a capital lease goes into the future?

#2

Lease payment of $1,000 received from Lessor.

Lessee records $120 in Interest Payment, $880 to capital Lease Liability Account and $1,000 on Accounts Payable.

You are also recording the asset on your books as though you owned the asset.

So Depreciation Account and Accumulated Depreciation would be accounted, as though you owned the asset.

#3

you already recorded $1000 under accounts payable so i am not sure where capital lease liability and interest payment would fall to make the balance sheet balance

#4

1000 Accounts Payable

matches

Interest Expense 120

Capital Lease Liability 880

======================

Depreciation X

matches Accumulated Depreciation +X

#5

Ok, and is depreciation the same amount each period on the capital lease (or is it based off the beginning asset balance on the capital lease)?

#6

You may use any depreciation method you like.

#7

so if you use straight line depreciation, the deprecriation rate on a capital lease would stay the same in ($$) amount in each period?

How is the interest expense calculated in each period then?

#8

There is no “depreciation rate” on the lease. The lease obligation is amortized (just like a loan, because that’s exactly what it is), and the amount typically is not constant year-over-year. It has nothing to do with the depreciation method that you choose to use on the equipment.

I wrote a series of articles on leases, beginning with: http://www.financialexamhelp123.com/leases-general/. They cover operating leases and capital leases and all of the calculations for the lessee and the lessor.

(Full disclosure: as of 4/25/16 there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)