Direct Financing Lease Interest Calculation

[kthompson1]

Hello, I'm using a calculation example from accounting guidance related to direct financing leases. There is a monthly rent payment that is fixed for 9 years (10,000 per year) and an initial net investment amount of $65,100. At the end of the 9 years, the lease will have a residual value of $5,260. I can use a simple formula to calculate the net investment at the end of each year by taking the previous net investment amount less the difference between the monthly rent payment and the monthly interest income. However, I need to somehow calculate the monthly interest income to a) be a consistent percentage of the previous years' net investment and b) result in $5,260 net investment at the end of the 9 year lease. The example result is 8%, essentially an amortization rate. As a result A=5,208; B=4,825; C=4,411; D=3,964; E=3,481; F=2,959; G=2,395; H=1,787; I-1,130.

The issue is I need the formula to then calculate the monthly interest income on an actual lease I'm entering into.

Year	Monthly Rent Payment	Monthly Interest Income	Net Investment at end of period
Beg.	$ -	$ -	$65,100
1	10,000	A	AA=651000-(10000-A)
2	10,000	B	BB=AA-(10000-B)
3	10,000	C	CC=BB-(10000-C)
4	10,000	D	DD=CC-(10000-D)
5	10,000	E	EE=DD-(10000-E)
6	10,000	F	FF=EE-(10000-F)
7	10,000	G	GG=FF-(10000-G)
8	10,000	H	HH=GG-(10000-H)
9	10,000	I	5,260.00

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1 The rate for amortizing the unearned income and initial direct costs to produce a constant periodic rate of return on the
remaining net investment is X%. This can only be determined by trial and error or by using a computer program.
2 This is the unguaranteed residual value at the end of the lease term.

Thank you for any help!

 

[oldbrewer]

Year	Monthly Rent Payment	Monthly Interest Income		Net Investment at end of period
	$ -	$ -		65100
1	10,000	3350	58450	AA=651000-(10000-A)
2	10,000	3350	51800	BB=AA-(10000-B)
3	10,000	3350	45150	CC=BB-(10000-C)
4	10,000	3350	38500	DD=CC-(10000-D)
5	10,000	3350	31850	EE=DD-(10000-E)
6	10,000	3350	25200	FF=EE-(10000-F)
7	10,000	3350	18550	GG=FF-(10000-G)
8	10,000	3350	11900	HH=GG-(10000-H)
9	10,000	3350	5250			5260
	you say 10000 per month, this is labelled year 1 to year 9
	can you say if the above is anywhere near to your needs ?

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[kthompson1]

Year	Monthly Rent Payment	Monthly Interest Income		Net Investment at end of period
	$ -	$ -		65100
1	10,000	3350	58450	AA=651000-(10000-A)
2	10,000	3350	51800	BB=AA-(10000-B)
3	10,000	3350	45150	CC=BB-(10000-C)
4	10,000	3350	38500	DD=CC-(10000-D)
5	10,000	3350	31850	EE=DD-(10000-E)
6	10,000	3350	25200	FF=EE-(10000-F)
7	10,000	3350	18550	GG=FF-(10000-G)
8	10,000	3350	11900	HH=GG-(10000-H)
9	10,000	3350	5250			5260
	you say 10000 per month, this is labelled year 1 to year 9
	can you say if the above is anywhere near to your needs ?

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That is very close to the solution, within $10. However, the monthly interest income must be the same percentage of the previous years' net investment, which I must not have previously mentioned so that's my fault. So in the solution provided in the guidance, Year 2's interest income is $4,825 (B), which is 8% of year 1's net investment of $60,308. The 8% is unknown initially and is what I'm having trouble determining how the example concluded at 8% in order for me to apply the math/formula to a real-life lease.

Thank you!

 

[oldbrewer]

However, I need to somehow calculate the monthly interest income to a) be a consistent percentage of the previous years' net investment and b) result in $5,260 net investment at the end of the 9 year lease. The example result is 8%, essentially an amortization rate. As a result A=5,208; B=4,825; C=4,411; D=3,964; E=3,481; F=2,959; G=2,395; H=1,787; I-1,130.
The issue is I need the formula to then calculate the monthly interest income on an actual lease I'm entering into.
Year	Monthly Rent Payment	Monthly Interest Income	Net Investment at end of period
Beg.	$ -	$ -	$65,100
1	10,000	X	55100+x
2	10,000	Y	45100+x+y
3	10,000	Z	35100+X+Y+Z
4	10,000	D	25100+X+Y+Z+D
5	10,000	E	15100+X+Y+Z+D+E
6	10,000	F	5100+X+Y=Z+D+E+F
7	10,000	G	-4900+X+Y+Z+D+E+F+G
8	10,000	H	-14900+X+Y+Z+D+E+F+G+H
9	10,000	I	-24900+X+Y+Z+D+E+F+G+H+I	< < 5260
2 QUESTIONS should it be 55100 - X
is not monthly interest a fixed % according to market rates ?

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