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Lease Accounting For Capital Lease With Bargain Purchase Option (Effective Interest)

Accounting for a capital lease with a bargain purchase option, showing how to setup and calculate the lease amortization schedule (using the effective interest method) for each lease payment plus the bargain purchase option payment and how to record the lease (using T Accounts) for the lessee and lessor, each lease payment includes three elements, (1) executory costs (maintenance, taxes, etc.), (2) fnancing cost (interest expense) and (3) reduction lease liability, capitalize as a leased asset (present valve of minimum lease payments plus present value of bargain purchase option), lease financing cost (incremental interest borrowing rate x beginning period carrying value of the lease), reduction of lease liability (minimum lease payment - interest cost for the period = principal reduction of lease liability for the period), annual depreciation for a bargain purchase is based on the economic life of the leased asset, ownership transferred to lessee at end of lease, remaining book value of lease to be depreciated (capital lease asset value - accummulated depreciation on lease = remaining amount to be depreciated), balance sheet journal entries for both lessee and lessor for the shown in T Accounts, detailed accounting example by Allen Mursau