Step By Step Solve Operating Lease Example on balance sheet

by ADAMSeptember 25, 20230 Comments

 Welcome Back to our blog tallynotespdf.co.in today we are going to solve an operating lease on a balance sheet example with a solution so if you are learning accounting then you should read this post till the end.


What are Operating leases?

In the world of business Operating leases are a common way for businesses to acquire assets such as office space, vehicles, or equipment without the upfront costs associated with purchasing them. 


Now let's jump to the Operating leases:


Operating Lease On Balance Sheet Example


Company ABC has entered into a five-year operating lease agreement for office space. The annual lease payment is 50,000 INR, and we need to account for this lease on the balance sheet.


  • STEP 1:- Identify the Lease Term


Your step should be to Determine the term of the lease, In this example, it's a five-year lease.


  • Step 2: Calculate the Present Value:


Year 1: 50,000 / (1 + 0.05) = 47,619 (rounded to the nearest dollar)

Year 2: 50,000 / (1 + 0.05)^2 = 45,308

Year 3: 50,000 / (1 + 0.05)^3 = 43,012

Year 4: 50,000 / (1 + 0.05)^4 = 40,762

Year 5: 50,000 / (1 + 0.05)^5 = 38,559


  • Step3:- Record the Lease Liability: 


Operating Lease Liability:


Year 1: 47,619

Year 2: 45,308

Year 3: 43,012

Year 4: 40,762

Year 5: 38,559


  • Step4: Record the Lease Asset:


Operating Lease Asset:

Year 1: 47,619

Year 2: 45,308

Year 3: 43,012

Year 4: 40,762

Year 5: 38,559


  • Step 5: Amortize the Lease Asset


Each year, the operating lease asset is amortized. This means its value is gradually reduced.


  • Step 5:- Yearly Reporting


update the values of both the operating lease liability and asset in the balance sheet each year, reflecting the amortization of the asset and the reduction of the liability as lease payments are made.



  • Impact on Financial Ratios:  operating lease liability and assets both can impact various financial ratios, such as debt-to-equity ratios. 

Conclusion


Here in this post, we solve an operating lease on balance sheet example with steps so if you want to know how to use an operating lease then you should read this post till the end.






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