Capitalized Lease Method

Definition of 'Capitalized Lease Method'


An accounting approach that identifies a company's lease obligation as an asset on its balance sheet. This is done because although the company has not taken ownership of the asset, the transaction is still considered to be a beneficial economic exchange for the lease holder. Under this method, the expenses are higher in the early years and gradually decline over the term of the lease.

Investopedia explains 'Capitalized Lease Method'


For example, assume that a company has a lease obligation of $500,000 for 10 years, with an interest rate of 10%. The company must make 10 payments of $81,372.70. These payments are comprised of both the interest payments and the principal payments. The interest payments are 10% of the lease balance. For example, the first interest expense is $50,000 ($500,000 x .10). The yearly payment less the interest expense is the principal payment, which reduces the lease balance. The lease is also amortized according to the company's respective amortization schedule. Assuming a straight-line schedule, the yearly amortization will be $50,000 ($500,000/10 years). Finally, the total annual capital lease expense that is realized by the company is equal to the interest expense plus the amortization, which is $100,000 ($50,000 + $50,000) for the first year. This annual expense will continue to decrease over the life of the lease.



comments powered by Disqus
Hot Definitions
  1. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  2. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  3. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
  4. TIMP (acronym)

    'TIMP' is an acronym that stands for 'Turkey, Indonesia, Mexico and Philippines.' Similar to BRIC (Brazil, Russia, India and China), the acronym was coined by and investor/economist to group fast-growing emerging market economies in similar states of economic development.
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s risk – e.g.: retirement payment liabilities to former employee beneficiaries. The plan sponsor can do this by offering vested plan participants a lump-sum payment to voluntarily leave the plan, or by negotiating with an insurance company to take on the responsibility for paying benefits.
  6. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
Trading Center