1. What is Lease Amortization?

Lease amortization is the process of gradually reducing a lease liability through periodic payments. Each payment consists of both interest and principal components, with the interest portion decreasing and principal portion increasing over time.

2. How Does the Calculator Work?

The calculator uses the following formulas:

Where:

• \( IP \) — Interest portion of payment ($)
• \( P \) — Principal balance ($)
• \( r \) — Interest rate (decimal)
• \( PP \) — Principal portion of payment ($)
• \( PMT \) — Total payment amount ($)

Explanation: The interest portion is calculated based on the current principal balance and interest rate, while the principal portion is the remainder after deducting interest from the total payment.

3. Importance of Amortization Calculation

Details: Understanding the breakdown of lease payments into interest and principal components is crucial for financial reporting, tax purposes, and managing lease obligations effectively.

4. Using the Calculator

Tips: Enter the principal amount in dollars, interest rate as a percentage, and the total payment amount. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between interest and principal portions?
A: The interest portion represents the cost of borrowing, while the principal portion reduces the outstanding lease liability.

Q2: How does amortization affect the balance sheet?
A: Each payment reduces the lease liability (principal) and recognizes interest expense, affecting both the balance sheet and income statement.

Q3: What happens if the payment is less than the interest due?
A: If payment is less than interest, negative amortization occurs where the principal balance increases rather than decreases.

Q4: How often should amortization calculations be done?
A: Amortization should be calculated for each payment period throughout the lease term to accurately track the lease liability.

Q5: Are there different amortization methods?
A: Yes, the most common methods are straight-line amortization and effective interest method, with the latter being more accurate for financial reporting.