Car company leasing its vehicles - how to book?

[graperone]

Hi,

I'm analyzing some car companies but I have trouble on understanding how they would book their leasing operations. Let's take Tesla, the car company, and assume a situation in which it leases one of its Model S vehicles ($80,000 price, $60,000 cost, leases for $1,000/month over a 36 month period). How would Tesla account for this lease in its book? If I'm not mistaken, Tesla remains owner of the vehicle, and after the 36 months the lessee can choose to buy the car for a predetermined value or Tesla can take it back and try to sell it to someone else. I would do the following, but it's not correct:

Balance sheet

Debit

$36,000 Lease receiveables

Credit

???

Would the balance sheet immediately reflect a gain in equity or would the credit side become $36,000 as well?


For the income statement, every month this would lead to:

Income statement

Debit

$??? Cost of goods sold/X months

$??? Depreciation of vehicle

Credit

$1,000 Lease revenue

Presumably, Credit - Debit here would be a positive number or it wouldn't hold in the long run.

I hope you can help me out as I'm at a loss.

Kind regards

 

[Drmdcpa]

If there is a bargain purchase at the end of a lease, it is not an operating lease; it is a capital lease. The latter is another form of purchase financing not renting.

 

[graperone]

If there is a bargain purchase at the end of a lease, it is not an operating lease; it is a capital lease. The latter is another form of purchase financing not renting.

What would be the difference?

I'm guessing that there will be both: situations where a company leases it for a few years and then lets Tesla have it, and situations where a private individual uses leasing to pay off the car in full

 

[kirby]

Since Tesla is the manufacturer of the cars they lease, their DFL leases will be a special type called a 'sales -type lease" where they will record a gain on the difference between their cost and the car's "price" (value used for the lease). Just FYI but back to your questions:

Lessor acctg (Tesla)
Operating Lease (rent of $1,000/mo)

First Tesla creates the car and relieves work in process at cost

DR Car (asset) $60,000
CR Work in Process $60,000
Notice there is no immediate gain in equity.


Car is leased for $1,000
Each month Tesla records

DR Lease rent receivable $1,000
CR Lease Income $1,000

And for an Operating Lease Tesla recorded the car as its asset so Tesla will depreciate the car
Lets assume $60,000 cost less $28,000 residual) = $32,000 to be depreciated and assume we depreciate over the term of the lease;

Each Month Tesla records

Dr Car Depreciation Expense $889
CR Accumulated Depreciation $889

Then at the end of 36 months, Tesla has a $28,000 residual asset on its books. Usual end of lease terms are lessee could buy the car, re-lease it for some term, or give it back to Tesla who will sell it.

Next post - DFL

 

[kirby]

Lessor acctg (Tesla)
DFL Lease (rent of $1,000/mo)

Assume your car is sitting in the "Car asset" g/l account as shown above
But this lease will be a DFL for $1,000/ month

Now you have to figure out an amortization schedule. Use an Excel workbook built for this or a program like Tvalue
Inputs: Loan of $60,000 (your cost) , 36 payments of $1,000, residual of $28,000
Equals : Implicit rate of 2.925% - (this is really low but I'm using your $1,000 on a $60K car so that's why)

You generate an amort schedule which shows
Month 1 payment of $1,000 goes to $853.23 of principal and $146.77 of interest
Total Interest earned will be $4,000

So first record the DFL asset and relieve the car asset account:

DR Direct Financing Lease Receivables $64,000
CR Unearned Income (Bal Sheet acct) $4,000
CR Car Asset $60,000

Again notice there is no immediate gain in equity

Then the lease begins
Each month Tesla records an entry following the amort schedule

Month 1
DR Rent receivable $1,000
CR Direct Financing lease receivable Lease Income $1,000
(to show the current month receivable)

DR Unearned Income (Bal Sheet Acct) $146.77
CR Earned Income (P&L Acct) $146.77
(To record Income per the amort schedule)

Tesla does not have a "car asset" - so there is no depreciation

Then -same thing as above at the end of 36 months, Tesla has a $28,000 residual asset on its books. Usual end of lease terms are lessee could buy the car, re-lease it for some term, or give it back to Tesla who will sell it.

One more post to recap

 

[kirby]

To recap

Operating lease
rents earned 36 times $1,000 = $36,000
Depreciation exp = 889 times 36 = 32,004
Income earned = $4,000 (roughly - the $889 is not exact and was used to simplify)

DFL
The unearned income of $4,000 becomes earned over time =
Income earned = $4,000

Cool, yes?

 

[graperone]

Thank you very much! What a great explanation, sir.

Kind regards,