Capital Lease

[Redpim2]

Hello ,
How would you record a new lease agreement that replaces a lease agreement that was capitalized 3 months ago. We made our first payment for the old lease. The lessor had to reissue a new lease agreement when changes are made to the old one. How would you account for it?

Thank you

 

[kirby]

"Had to reissue a new lease when changes were made to the old one"...

because???

for example - maybe the names of the lessor\lessee had to be slightly corrected - so - same agreement = same accounting
but
maybe now the terms mean you no longer have a capital lease
POINT IS: - nobody can help you with such a lack of facts to work with\
So -
Need to know what changed

 

[Redpim2]

"Had to reissue a new lease when changes were made to the old one"...

because???

for example - maybe the names of the lessor\lessee had to be slightly corrected - so - same agreement = same accounting
but
maybe now the terms mean you no longer have a capital lease
POINT IS: - nobody can help you with such a lack of facts to work with\
So -
Need to know what changed

My appologies.

Initially we had 2 types of equipment listed on the original lease with a lessor's stated interest rate of 12%. After we made our first payment we ended up buying the other type of equipment to the Lessor . The Lessor had to issue another lease agreement for the one type of equipment that we did not buy at an interest rate of 10%.

I have a remaining balance of 8.5 on Capital Lease Obligation account on my balance sheet and i need to record the new lease agreement. Lease Term is 22 with residual value of 1.5 . The agreement states we can buy the equipment for an which is the greater of 1.5 M or the fmv at the end of the lease term .
Estimated useful life of the equipment is not given.
No implicit interest rate on the agreement itself. The 10% is what they just told me but this is not stated on the contract.
Monthly payments of 350k.
Residual Value of 1.5M
Cost of the Equipment is 14.3M ( we made 50% DP)

How would you account for this type of lease? How would i close out the old lease balance and reflect the new lease agreement?

Thank youu

 

[kirby]

To answer your direct questions:
To close out old lease - indeed you no longer have that agreement. So reverse out all the entries you made related to that . Even the first payment on the old lease (not technically correct but easier to follow). Then record the purchase of the equipment. Record the one month lease payment you made as equip rent EXCEPT for any amount the vendor applied to the purchase - record any of that as part of the purchase.

Now you have the new lease to record - since we don't know the useful life and you capitalized the first deal I have to ASSUME the second is also to be capitalized (HEY - who helped you book the first deal and why are you not asking them how to do this??) Now we have a tricky issue for you to consider above all of this lease acctg stuff:

Assume you are the lessor and you are calculating your return on this deal - using Excel you have these cash flows; period zero MINUS $14,300,000 LESS DP so = MINUS 7,150,000 then 22 months of positive 350,000 then the residual in month 23 at positive $1.5MM Hit that with the irr function and you get 1.987% - wow I really scored you say 1.98 % a year financing BUT remember our periods are MONTHS not years so that's 1.98% times 12 = 23.7% Hell of a rate to pay these days! So when the lease guy said the rate is "10%" - was he grinning?? Someone else on this board - and on your team - should double check my quick math - point is - maybe you should just BUY the second piece of equip too and stop getting gouged.