How to Calculate Capital Lease
Capital lease is a method of leasing where the lessee can take ownership at the end. As opposed to standard leases with purchase options, this is treated more as a finance deal rather than fixed monthly payments. There is a total value, a pay period and an interest rate, like there is with a home loan. However, since it is a lease rather than financing, it is less risky for the original owner, as ownership does not actually change hands until it is fully paid-off.
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Instructions
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The Lease
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1
Agree upon a total price and pay period with the owner.
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2
Agree on an interest rate, how many payments there are going to be (and, therefore, how much each payment will be). This means you need to figure out the total cost of the equipment (with compounded interest) and divide it by the agreed-upon number of payments.
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3
Multiply the interest rate by the lease balance.
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4
Subtract the figure in step 3 from the amortization, which is the amount of the lease balance you are paying in this payment.
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5
Subtract the figure you arrived at in step 4 from your lease balance.
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6
Use the new lease balance to calculate your next payment.
Balance Sheet
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7
Subtract your interest payments from each payment from your net income as expenses.
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8
Add your lease balance (principal) payments to your net income as assets.
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9
Deduct step 1 from your taxable balance.
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1
Tips & Warnings
Your first payment will be almost entirely interest and your last payment will be almost entirely principle. Make sure your results follow this model.
Make sure the purchase terms are clear, particularly with regard to end-of-lease charges.
References
- Photo Credit Combine Harvester on the road image by asmik from Fotolia.com
