In a previous blog, we covered how to calculate the present value of lease payments using Excel spreadsheets. In this article, we will demonstrate how to calculate the present value of minimum lease payments as well as prepare the liability amortization schedule for the lease liability in the same step, using Excel.

This information is important not just for companies that plan on continuing to use Excel spreadsheets for lease accounting. Even if you plan to use lease accounting software to comply with the new lease standard, you can use the information in this blog to ensure that your chosen software provider is actually performing this calculation accurately.

Basically, with the method we explained here, you’ll have everything you need to comply with ASC 842 and IFRS 16, the new lease accounting rules, powered only by an Excel spreadsheet.

For a comprehensive example of how to transition from the current lease accounting rules to the new lease accounting standards click here. In that blog, we reference the methods laid out below for our calculations.

## What is lease liability?

In accounting, lease liability is defined as the present value of your future lease payments. Or, the liability that is recorded in addition to the right of use asset for operating leases and capital leases.

To learn more about lease liability, read out blog, ROU Asset and Operating Lease Accounting under ASC 842: A Full Guide and Example.

## How to create the lease amortization schedule and calculate lease liability Here are the steps to follow to calculate the present value of lease payments and the lease liability amortization schedule using Excel when the payment amounts are different, starting with an example:

Calculate the present value of lease payments for a 10-year lease with annual payments of \$1,000 with 5% escalations annually, paid in advance. Assume the rate inherent in the lease is 6%.

### Step 1: Create an Excel spreadsheet with these five columns

Create a new Excel spreadsheet and title five columns with the following headers: Period, Cash, Expense, Liability Reduction, and Liability Balance, as shown below: ### Step 2: Enter number periods and cash payments

Enter the number periods starting from 0 to 9, and enter the cash payments in each period. Because payments are made in advance, the first payment of \$1,000 is made in period 0. Please see illustration below: ### Step 3: Enter the expense formula

Enter “0” for expense in period 0 and period 1 (because payments are made in advance). In expense for period 2, enter the cell for the period 1 liability balance and multiply by 6%. See below. ### Step 4: Fill the expense column

Copy the formula for expense in period 2 down for the remaining expense columns. ### Step 5: Enter the formula for liability reduction

The formula for each liability reduction image is the corresponding cash minus the corresponding expense. See below. ### Step 6: Set period 0 to 0 and enter the formula for liability balance

Enter “0” for the liability balance in period 0. In liability balance for period 1, enter the cell for liability balance in period 0 minus the liability reduction in period 1. So it’s the previous liability balance, reduced by the current liability reduction (see below). ### Step 7: Fill the remaining liability balance column

Copy the formula for liability in period 1 down for the remaining liability balance columns. ### Step 8: Perform “What-If Analysis” on the liability balance

Select the liability balance for period 10. Go to the “Data” tab, then the “What-if Analysis” Tab, then select “Goal Seek.” ### Step 9: Set liability balance value to 0 by changing the cell for period 0

In the dialog box that follows, make sure the “Set cell” is set to the cell representing the liability balance for period 10, in the “To Value” enter 0, and in the “By Changing Cell” enter the cell representing the liability balance for period 0. See below. ### Step 10: Click “OK”

After you click ok, Excel will prepare your amortization schedule for you automatically. See below. Based on this, the present value of a 10-year lease with payments of \$1,000 annually, 3% escalations and a rate inherent in the lease of 6% is \$9,586.

### Please note the following:

This is the exact same amount we calculated using the other method in our blog on calculating present value.

Each month, your payment (the cash column) is split between expense (the expense column) and liability reduction (the liability reduction column). To illustrate, your total payment of \$1,050 in period 2 is allocated as \$515 in expense and \$535 in liability reduction.

With this schedule you have everything you need to make your journal entries for the entire life of the lease.