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Capital Lease Question

Hello - we have a capital lease arrangement for tech equipment (laptops, etc). The total value now is for ~$10k, but we may add on equipment on an ad hoc basis. How would you account for this? I am going to be ignoring interest for this exercise. Thinking of: DR: $10k capital lease asset for sum of expected lease payments over life of assets CR: $10k capital lease liability for sum of expected lease payments over life of assets Monthly: *Invoices going against the liability account *Separate journal entry for depreciation, crediting the asset account through straight line depreciation What would you do if we add on a laptop in month 3? Thanks

Answers

(Agent, JKS Solutions, Inc.) |

If you are leasing computer equipment, given the burnout rate you are correct, probably meets the capitalization requirements.

But make your life easier,

For each block of computers you lease, execute a different lease for the same terms. That way you don't need to worry about how to treat the additional equipment.

I'm surprised the leasing company didn't require separate documents for each block.

Related to your other questions, in general you will calculate the asset cost at the NPV of the lease value. You can certainly find some help at www.fasb.org by registering for a free account so you have access to the accounting standards.

I don't know the ASC for this but its Old FAS13, can probably find the ASC via google.

PS another great resource for those who need US GAAP guideance is the Wiley GAAP book that runs between 50 and 100 on Amazon. The information in the asset and leasing area is reliable, although I would stay aware from IFRS guideance since I found errors there during discussion with internationals.

Michael VanderGoot
Title: Director of Audit
Company: BC Compliance Group, LLC
(Director of Audit, BC Compliance Group, LLC) |

Currently the FASB is still in the process of drafting the new Lease standards so they can be re-exposed for comment. The plan has been delayed several times while but in Feb 2013 the FASB said it should be issued in 2nd Qtr 2013.

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Anon, your contract with the lessor will ideally consist of two parts. One is the lease agreement (the "master" lease contract) and the other is a schedule. This is the practical way to accomplish what Valerie sugggested. A schedule, which is typically only one or two pages in length, lists and describes each item of equipment leased, gives the location, the term and the lease rate or payment. If you leased several items of equipment today, for example, they would normally be grouped on one schedule, especially if the items are similar. A schedule references and is "made part of" the master lease agreement.

Each time you lease one or more pieces of equipment, it's customary to execute a new schedule for these additional items. That way, if the lease term for a block of computers is 36 months, it will be 36 months from the delivery or in-service date of each "block." Or, if the term for this latest item or group is only 24 months, that's easily captured in the schedule.

There's nothing inherently wrong with executing a completely new lease each time. Some lessors use only that kind of lease contract, especially for smaller value items. But, it's often simpler to just add another schedule if the documents allow.

Anonymous
(Finance) |

Thanks all - Jim, I think the schedule makes the most sense, as add-ons will be relatively small value items.
Should depreciation = the lease payments, such that assets and liabilities move in tandem?

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Anon, if it's a capital lease (typically containing a nominal or stated purchase option), your firm is treated as the equipment owner for tax and accounting purposes. The lease payment is handled the same as a loan payment. It must be split into interest and principal components for accounting entries. Whether the lease payment equates to depreciation depends on the depreciation method and salvage value assumption that you make.

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