A lease provides a company with the ability to acquire an asset by making monthly payments as opposed to paying the entire purchase price every month. Companies can lease equipment to prevent getting stuck with outdated equipment, which is the case if the company purchases equipment. It is important to account for the wear and tear on equipment by depreciating it over its useful life. Depreciation of leased equipment is recognized as an expense on the company’s income statement, which reduces revenue from the business. The most common way to calculate depreciation for financial purposes is to use the straight-line method, as explained by the AccountingCoach website.
Confirm the cost of the leased equipment. View the lease agreement to determine the cost of the equipment. For example, assume that a company leases manufacturing equipment that costs $25,000.
Verify the length of the lease. Determine the length of the equipment lease by viewing the lease agreement. The length of the lease indicates how long the company will have use of the equipment. The equipment can be depreciated every month that it is in use. Assume a company leases the manufacturing equipment for five years, which equals 60 months.
Subtract the value of the equipment at the end of the lease from the cost of the equipment. Assume that a company leases equipment for $25,000 that will have a value of $5,000 at the end of the lease. Subtract $5,000 from $25,000, which equals $20,000. This is the depreciable amount of the lease.
Divide the depreciable amount of the lease by the number of lease months. This determines the amount of monthly depreciation on the leased equipment. Assume the depreciable cost of the lease equipment is $20,000 and the lease ends in 60 months. In this case, the monthly depreciation expense associated with the lease equipment equals $333.33.