Could someone add a little more explanation as to how A=L +E are balanced when a lease is capitalized? For example, is the PV of the lease payments added to both the assets and liabilities? And, if so, how would this balance out if Retained Earnings (Equity) increases as well?? This thread has become pretty confusing so if somebody could help clear it up, that would be very helpful.
Bluey 1.8T Wrote: ------------------------------------------------------- > does anyone know what the actual accounting > entries are when capitalising an expense? > > DR ?? > CR ?? Dr. Asset Cr. Cash/Payable
Look at it this way Capital Lease Asset increased because of the PV(MLP) Then in the year there is a depreciation expense (which would reduce the Asset) Liability: Current Liability --> Increase (Portion of PV(MLP) due in the next year). Long Term Liability --> Increase (Remaining Portion of PV(MLP)) Equity --> Increase due to portion of NI making its way back as retained earnings This portion NI–> a) Would be lesser because of Depr + Int Exp (both effects of the lease itself). b) and would have the AFTER TAX Impact of deduction of these items So all in all, it would balance out. CP
jalmy8 Wrote: ------------------------------------------------------- > Could someone add a little more explanation as to > how A=L +E are balanced when a lease is > capitalized? > For example, is the PV of the lease payments added > to both the assets and liabilities? And, if so, > how would this balance out if Retained Earnings > (Equity) increases as well?? > > This thread has become pretty confusing so if > somebody could help clear it up, that would be > very helpful. When a lease is capitalized, you increase asset and liability. The equity is unaffected initially. The asset is written down during the life of the lease and equity is decreased during this process. Initially: Dr. Asset Cr. Liability Making Lease Payment: Dr. Liability Cr. Cash Depreciating Asset Dr. Dep. Exp. Cr. Acc. Dep. (This is a contra asset account that is netted against asset to arrive at BV) Does this help?
Sort of. Initially we book both an asset and a liability - both of which are the PV of the lease payments. The lease payment made each year is composed of both an interest expense and a principal repayment. The interest expense will decrease net income (Equity). Principal repayment will decrease the liability. Total CF’s will remain the same each year. Depreciation expense will write down the asset. OK. So lets say that the asset is written down at the same continuous rate until 0. Interest expense decreases over time and principal payments increase over time. Therefore, I am led to believe that Net Income (therefore Equity portion as well), although lower in the early years, will decrease at a lesser rate over time. Liabilities will decrease at a greater rate over time. Assets decrease at a continuous rate. Therefore, Assets = Liability + Equity. Does this make any sense or am I just an idiot. I don’t know why this has become such a hassle. I know I can answer the basic questions about profitable ratios or why Net Income is less under an operating lease but understanding the big picture step by step has been an issue.
jalmy8 Wrote: ------------------------------------------------------- > > OK. So lets say that the asset is written down at > the same continuous rate until 0. Interest > expense decreases over time and principal payments > increase over time. Therefore, I am led to > believe that Net Income (therefore Equity portion > as well), although lower in the early years, will > decrease at a lesser rate over time. Liabilities > will decrease at a greater rate over time. Assets > decrease at a continuous rate. Therefore, Assets > = Liability + Equity. I believe you are right on point.