how should the future value equation be modified if compounding occurs more frequent 613211

Early termination of finance leases by lessees

In in above there is effectively a guarantee of a residual of €3,000 dependent on the mileage done by the leased vehicle. Assuming that the lease is capitalised as a finance lease, if the lessee considers at the lease inception that the guarantee will not be called on, then he will depreciate the vehicle to an estimated residual value of €3,000 over the lease term. In the event that his estimate is found to be correct, then the loss on disposal of the asset at its written down value will be equal and opposite to the gain on derecognition of the lease obligation of €3,000. However, if, for example, €1,000 of the guarantee was called on, whereas the lessee had estimated that it would not be, then the net book value of €3,000 and the unused guarantee of €2,000 will both be derecognised and a loss of €1,000 will be shown on disposal of the vehicle.