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I work for a small construction company. A lot of our equipment vendors will allow us to rent a piece of their equipment on a month to month basis, but if and when we say we want to buy the piece of equipment, they will credit either all of a high percentage of what we paid in monthly rent against the original purchase price. I'm not sure if this is their SOP, or if it's a biproduct of the strong relationship our Fleet Director has with these companies. We're under no obligation to purchase the piece of equipment, nor is there a defined term like there would be for a lease; we can choose to purchase the equipment or turn it back in at any time.
I'm struggling with how to account for these situations. I don't see this as a capital lease since there's no defined term or anything like that. I'd like to take the rent expense off the books to capitalize with the asset but that seems like having your cake and eating it too. Basically I see three different options:
1.) Treat it as a capital lease. Capitalize the purchase price of the asset when we start one of these agreements and put the liability on the books. Amortize the monthly payments and if/when we decide to purchase, extinguish the cap lease liability. My hang-up here is if we decide not to purchase the equipment, suddenly we're going to have to recognize a big rent expense.
2.) If/when we decide to purchase, go back and credit all of the rent expense and capitalize the full purchase price. This way seems too good to be true and could also result in big swings in rent expense, this time suddenly recording a large credit when we decide to buy.
3.) Expense the monthly rent and only capitalize the remaining balance if/when we purchase. This could result in capitalizing a $40K piece of equipment for $10K.
Any and all thoughts or information is greatly appreciated!
I'm struggling with how to account for these situations. I don't see this as a capital lease since there's no defined term or anything like that. I'd like to take the rent expense off the books to capitalize with the asset but that seems like having your cake and eating it too. Basically I see three different options:
1.) Treat it as a capital lease. Capitalize the purchase price of the asset when we start one of these agreements and put the liability on the books. Amortize the monthly payments and if/when we decide to purchase, extinguish the cap lease liability. My hang-up here is if we decide not to purchase the equipment, suddenly we're going to have to recognize a big rent expense.
2.) If/when we decide to purchase, go back and credit all of the rent expense and capitalize the full purchase price. This way seems too good to be true and could also result in big swings in rent expense, this time suddenly recording a large credit when we decide to buy.
3.) Expense the monthly rent and only capitalize the remaining balance if/when we purchase. This could result in capitalizing a $40K piece of equipment for $10K.
Any and all thoughts or information is greatly appreciated!