USA Leased equipment

[Riya]

Hi all,
Our company financed capitalized equipment for 5years with an option to purchase at end for $1 and charging us monthly rental payment. There is no interest mentioned in the contract but I know what we owe them in total which is more than the amount of capitalized equipment because interest is embedded in payments. Let’s say equipment is 100k and total payment is for 120k in 5 years. Question is do I need to calculate interest and principal on these monthly payments? What amount is the fixed asset and liability. Do I put Fixed asset for 100k and loan payable with the same amount? Thanks

 

[kirby]

Fastest easiest way to get info is to ask the leasing company for a "lease amortization schedule" that uses the amounts per your agreement. They will probably says they shouldn't do this but if you persist you can usually get them to make this for you.

 

[Riya]

Thanks Kirby, I have already checked with them and they don’t have any. They are considering payments as rental payments.

 

[Riya]

I have already created one on our end but my question is what will go on balance sheet as assets and as liability ?

 

[kirby]

By definition, leases do not involve an interest rate.A lease accounting system does not have a data field called "interest rate." Interest rates apply to loans and not to leases, As you can tell just from that, lease accounting is a bit tricky to deal with the first time through.

If you have a CPA that audits your annual financial statements give that person a call and ask for assistance. Usually this costs $$$ so first ask your mgmt for approval to ask CPA for a cost estimate and get mgmt approval before engaging CPA. CPA is going to spend time on this anyway at audit time so there is no extra cost here. Might as well get things straight up front.

 

[Werner Reisacher]

When it comes to handling lease agreements, it depends whether we are dealing with a capital lease or an operating lease.
FASB decided in 2016 that effective December 14th, 2018 public companies, and effective December 14th, 2019 private companies are required to capitalize all leases with contract terms beyond 1 year in their financial statements.

To qualify as capital leases, such contracts must meet at least one of the following conditions:
- Life of lease must be at least 75% or greater of the asset's useful life
- Must have a bargain purchase option for a price less than the market value of an asset
- Ownership is transferred to the lessee at the end of the lease period
- The present value of the lease payment must be greater than 90 % of the asset's market value.

Be careful before applying section 179 depreciations. I am not up to date with the latest amendments in connection with the ongoing tax law changes as part of the Cares Act.