Finance Leases & Accounting Equation difference, liability, interest, balance, example

Ionutzakis

So as we go through the years of a finance lease, the book value of the lease (asset) and the fair value of the liability will temporarily go out of balance (depreciate one, pay down w/ interest the other).  So what gives to keep A=L+E?  Retained earnings?  Cash?  This example is from the blue box in schweser pg 53, but they don’t really say where the difference is made up.





Asset
Liability

Beg. Lease Value
Depr
Int Expense
Pmt
End BV
End Lease
0




  34,651
    34,651
1
                 34,651
  8,663
          2,079
  10,000
  25,988
    26,730
2
                 26,730
  8,663
          1,604
  10,000
  17,326
    18,334
3
                 18,334
  8,663
          1,100
  10,000
    8,663
       9,434
4
                   9,434
  8,663
             566
  10,000
0
0

stalkey

woodywoodford wrote:So as we go through the years of a finance lease, the book value of the lease (asset) and the fair value of the liability will temporarily go out of balance (depreciate one, pay down w/ interest the other).  So what gives to keep A=L+E?  Retained earnings?
Retained earnings: depreciation expense and interest expense go through the income statement, then to RE.

RobertA

Ahh, that helped a lot.  Also kudo’s on making sense of that post, apparanlty pasting excel tables doesn’t get along with AF very well