Asset and Liabilities (Question from Customers)
I have a question about one of the videos regarding finance and operating leases. It’s the video titled ‘Finance Lease Exercise’. At the end of year 1, there is a difference between the ending lease liability and asset because of different amounts being used for depreciation/liability reduction. How is this balanced out on the balance sheet? Thank you.
Answer: The balance has to be Asset = Liabilities + Equity. It is ok if Asset is not equal to Liabilities.
Since Depreciation and Interest payment will reduce the net income, so the equity will be reduced. so 680.8 and 4538.7 will appear in the right hand side. And we need cash to pay these, so they will appear in the left hand side also.
For principal payment, it reduces the liabilities (right hand side) and since we need cash to do this payment, it appears in the left hand side. So they are all balanced.