Interest Expense of Capital Lease

CFA Level I
#1

For a lessee, capital lease interest expense should be equal to: Discount Rate x Leasehold Asset or Discount Rate x Leasehold Liability Either way???

#2

Discount Rate x Leasehold Liability. The asset has nothing to do with interest… PV of lease is booked as asset and amortized over life.

#3

Isn’t the leasehold liability the same amount as PV(Lease PMT)?

#4

Yes and No Yes: In the very beginning at T=0 and at the very end when Leasehold liability = 0 No: Every other time.

#5

Hmm, so to be a bit more precise, capital lease interest expense should be equal to Discount Rate x Current Leasehold Value? Given the following info. Possible to calculate the 2nd year interest expense? Thx. A firm has just signed 5-yr lease on a new machine Lease PMT $20,000/yr payable at the end of the yr No salvage value till the end of the lease Machine has a 5-yr useful life The firm’s incremental borrowing cost is 11% Lessor’s implicit rate is 10% Lease is a capital lease.