Manufacturer selling item on lease

USA Discussion in 'General Accountancy Discussion' started by kynsyc, Jun 11, 2018.

  1. kynsyc

    kynsyc

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    Good morning all.

    Obviously, I have a question.

    If a manufacturer builds an item using the percent completion method and then sells it to someone using a capital lease agreement, how should things be accounted for.

    I have an idea, but would like some confirmation.

    Here is how I think things would go along with some numbers?

    1. The production of the item would not fall under the normal revenue recognition method as other percent of completion project. All costs could just be accumulated in WIP until completed. No revenue would be recognized.
    2. When completed, the constructed asset would be moved out of WIP and into a lease receivable.
    3. The present value of the future lease payments would be calculated and recorded as unearned interest revenue
    4. The difference between the cost to manufacture and the total lease value would be deferred revenue.
    5. As payments came in, the lease receivable would be credited.

    For example:

    Constructed asset costs = $300,000
    Total Lease Price = 360,000 over 36 months (10k/month)
    Present Value of Future Payments (@ 4%, 36 mths) = 189,082

    How would I set this up in my balance sheet and record the monthly payments to effect the asset, deferred revenue, and interest revenue?
     
    kynsyc, Jun 11, 2018
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  2. kynsyc

    kirby VIP Member

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    Your step 4 needs to be fixed.
    There is an element of "sales profit" in your case because you manufactured the equipment. So you need to follow the "sales type lease" method of accounting. Under that method you can record the "sales profit" amount as income immediately and not deferred over time. I posted on this board the basic accounting for leases.

    Look back to my 10/31/17 post in the General Accountancy forum. I think that will help.
     
    kirby, Jun 11, 2018
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    kynsyc likes this.
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