Interest expense of lease payment at the beginning Vs at the end of the period

CFA Level I
#1

hello every one

why there’s a difference in accounting the lease liability if the annual payment occur at the beginning or at the end of period?

#2

For the same reason that the value of an ordinary annuity is different from the value of an annuity due.

If you pay at the beginning of the period, you reduce the principal immediately; if you pay at the end, you don’t.

#3

On the balance sheet the present value of the liability will be immediately reduced by the first principal payment at the beginning of the period, hence lower compared to an end of period payment.

The corresponding effect on the income statement is that compared to an end of period payment the annual interest payment over the life of the lease will be lower.

Regards, Oscar

#4

So we can say that the ratios of debt-to-equity and debt-to-assets will be lower in the payments occur at the beginning compared to that occur at the end?

#5

But why we should to consider whole the amount of first payment as liability reduction?

#6

Because no interest has accumulated.

And, yes, those ratios will be lower.

#7

yes got it

thank you MR magician for ur efforts

#8

You’re quite welcome.