USA Question about capitalized lease agreement


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I have a beginner question on this example related to lease capitalization:

It is a 4-year lease, requiring the lessee to pay $10,000 per year. The discount rate is 10%.
From these parameters, we can easily get the allocation of the $10,000 in each year:

YearOpening LiabilityInterestPrincipalClosing Liability
Year 0NANANA$31,700
Year 131,7003,1706,83024,870
Year 224,8702,4877,51317,357
Year 317,3571,7358,2659,092
Year 49,0929099,0920

Then the following is the balance sheet of the capitalized lease

AssetsYear 0Year 1Year 2Year 3Year 4
Leased assets31,70031,70031,70031,70031,700
Accumulated depreciation 07,92515,85023,75531,700
Net31,70023,75515,8507,9250

LiabilitiesYear 0Year 1 Year 2Year 3Year 4
Current portion of lease obligation6,8307,5138,2659,0920
Long-term debt: lease obligation24,87017,3579,09200
Sum31,70024,87017,3579,0920

My questions are:
  1. Why do we have to use the straight-line method to depreciate the leased assets? Why can't we just decrease the leased assets by the current portion of lease in each year?
  2. Because we depreciate lease assets and lease liabilities in different ways, the lease assets are not equal to the lease liabilities in Year 1, Year 2 and Year 3. How do we re-balance this inequality?
 
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BIG E

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I suggest you do your homework assignment on your own.
 
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It is not homework. It is an example from the textbook (Page 368 of the Analysis and Use of Financial Statements). I am learning accounting by myself.
 
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kirby

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Andrew

Book you are using to self-teach yourself was published about 2002. It's too out of date. Suggest "Intermediate Accounting" by Kieso. It is huge and pricey but current.

I get that you are asking a conceptual question only. As to question1, keep in mind that you are dealing with two different things here. The asset is, to put it badly, a physical "thing". Depreciation for assets typically uses st line or an accelerated method. Meanwhile, the lease liability is not a physical thing but a future amount due that is calculated using time value of money.

As for question 2, it is not a problem that both amounts are not equal. And at the end of the lease term, both will have a zero value.
 

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