Question

Journalize the transactions in the books of lessor and lessee if the lease meets the criteria for recognition as an operating lease instead of a finance lease.

Answer 1

As per the Indian GAAP, in case of Operating Lease, ownership of the asset is not transferred to lessee at the end of the lease term, so rentals are recorded as expense in case of Lessee and its income for Lessor:

Taking example where lease starts in mid of the year and showing journal entries for two periods:

Books of Lessee:

Year 1:

Lease Rent Expense A/c -- Dr

To Bank A/c

To Accrued Lease Rent A/c

Year 2:

Lease Rent Expense A/c -- Dr

Accrued Lease Rent A/c -- Dr.

To Bank A/c

No depreciation will be recorded in the books of Lessee as Lessee do not own the asset.

Books of Lessor:

Year 1:

1. Bank A/c -- Dr.

Lease Rent Receivable A/c Dr.

To Lease Rent Income

2. Depreciation A/c -- Dr.

To Asset

Year 2:

1. Bank A/c -- Dr.

To Lease Rent Income

To Lease Rent Receivable

2. Depreciation A/c -- Dr.

to Asset