In the finance lease, the interest payments are charged to various years on the basis of different methods. It depends upon the situation and the nature of the lease term. The common methods are:
Straight line method
In straight line method of interest allocation, the same amount is charged to every reporting period. That is why, it is the most simple method. The formula to calculate the periodic interest expense is as follows:
Total finance cost / Number of finance periods
Actuarial method
This interest rate is calculated using the computer or a method of trial and error. If in the example, you are given the interest rate, then it would mean that this is the rate calculated using the actuarial method.
Sum of digit method
In this method, we use the following formula:
n (n+1) / 2
Where n is the number of years. After calculating this factor, we multiply the factor with the total amount of interest.