USA Equipment Finance Agreement

[acnt55]

I have an equipment finance agreement for the purchase of an industrial asset. I have both the purchase price of the equipment and the total cost of the contract which has to be paid. How do I record the asset and liability accounts when the price of the equipment is less than the total amount of the equipment finance agreement cost. The equipment finance agreement comes with a finite amount of interest/financing factored into the total contract price, but does not state interest rate, just total amount for financing.

Example:

Asset/Equipment purchase price: $100,000

Equipment Finance Agreement: $120,000 over x years.

Do I set the asset up as actual purchase price and the contract as full amount due? If so how to I balance the asset and liability accounts with differing prices?

Do I set up the asset as total contract price including interest even though that is not the actual price of the equipment?

 

[DrStrangeLove]

I'm assuming the 120,000 over n years means you're making payments that total 120,000 over those n years. Do I have that right?

The finance agreement is an exchange of a purchase price today for a package of payments in the future. There's an implied interest rate that makes the present value of the future payments equal the purchase price today. You treat the liability for the financing agreement as an amortizing loan at that implied interest rate.

So at purchase: DR Equipment 100,000/CR Financing Agreement - Equipment 100,000

At each period after that, interest on the financing agreement accrues at the implied interest rate. (To you, that's Interest Expense and Interest Payable accounts.) Payments (presumably cash) decrease the balance in the Financing Agreement - Equipment account as well as paying off the Interest Payable account.