Lease Accounting: Vehicle Leases and Journal Entries
Today is May 31, X1, and we lease three vehicles to visit our factories for €120,000. The contractual conditions are as follows:
- The term of the lease is 4 years.
- The payments (€35,000 each) are annual and will be made on May 31. An additional €1,000 will be added as a purchase option in the final payment.
- Effective interest rate: 6.75%
- The estimated useful life for each vehicle is 8 years.
Lease Amortization Schedule
| Period | Interest (€) | Payment (€) | Amortized Principal (€) | Amortized Cost (€) |
|---|
| May 31, X1 | | | | 120,000.00 |
| May 31, X2 | 8,097.64 | 35,000.00 | 26,902.36 | 93,097.64 |
| May 31, X3 | 6,282.26 | 35,000.00 | 28,717.74 | 64,379.90 |
Journal Entries for Lease Transactions
May 31, X1: Initial Lease Recognition
| Code | Debit (€) | Credit (€) |
|---|
| 218 (Right-of-Use Asset) | 120,000.00 | |
| 524 (Short-term Lease Liability) | | 26,902.36 |
| 174 (Long-term Lease Liability) | | 93,097.64 |
October 31, X1: Lease Interest Accrual (5 Months)
| Code | Debit (€) | Credit (€) |
|---|
| 662 (Interest Expense) | 3,373.99 (8,097.64 / 12 * 5) | |
| 527 (Accrued Interest Payable) | | 3,373.99 |
October 31, X1: Vehicle Depreciation (5 Months)
| Code | Debit (€) | Credit (€) |
|---|
| 681 (Depreciation Expense) | 6,250.00 (120,000 / 8 years / 12 months * 5) | |
| 281 (Accumulated Depreciation) | | 6,250.00 |
May 31, X2: Lease Payment and Reclassification
This entry combines the remaining interest accrual, the annual payment, and the reclassification of the lease liability.
| Code | Debit (€) | Credit (€) |
|---|
| 662 (Interest Expense) | 4,723.65 (8,097.64 / 12 * 7) | |
| 527 (Accrued Interest Payable) | 8,097.64 (Payment of total annual interest) | |
| 524 (Short-term Lease Liability) | 26,902.36 (Principal payment) | |
| 572 (Cash) | | 35,000.00 (Total annual payment) |
| 174 (Long-term Lease Liability) | 28,717.74 (Reclassification to short-term) | |
| 524 (Short-term Lease Liability) | | 28,717.74 |
Credit Facility Accounting and Journal Entries
On October 1, X5, a credit line was opened with an amount of €80,000. Two cash drawdowns occurred: a first for €15,000 on October 20th, and a second for €24,000 on December 5th.
The credit line has upfront legal fees of €1,500, and the annual interest rate is 3%, to be paid at the end of each quarter (every three months). As of December 31st, X5, no entries had been posted regarding this credit line. The credit line is subject to cancellation at the end of its term.
Note: For interest calculation, please consider 30-day months and 360-day years.
Journal Entries for Year X5
October 1, X5: Credit Line Agreement and Fees
| Code | Debit (€) | Credit (€) |
|---|
| 626 (Bank Services Expense) | 1,500.00 | |
| 572 (Cash) | | 1,500.00 |
October 20, X5: First Cash Drawdown
| Code | Debit (€) | Credit (€) |
|---|
| 572 (Cash) | 15,000.00 | |
| 5201 (Bank Credit Line) | | 15,000.00 |
December 5, X5: Second Cash Drawdown
| Code | Debit (€) | Credit (€) |
|---|
| 572 (Cash) | 24,000.00 | |
| 5201 (Bank Credit Line) | | 24,000.00 |
December 31, X5: Interest Accrual
| Code | Debit (€) | Credit (€) |
|---|
| 662 (Interest Expense) | 137.50 (15,000 * 0.03 * 70/360 + 24,000 * 0.03 * 25/360) | |
| 527 (Accrued Interest Payable) | | 137.50 |
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