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New Fixed Asset Includes 4 Years of Support....

Ken Bozzini's Profile
I guess I am still in summer mode and I am having a hard time thinking what the correct answer is. My Finance Manager is setting up a new fixed asset, computer, that includes four years of support. We are leasing this over three years with a $1 buyout. The question she asked me is whether we should break the support out and amortize it to the P&L as a SG&A support expense. My gut is no, as it is bundled in the cost of the asset acquisition. Any thoughts on what best practice is? And yes, it is a material number with respect to the entire purchase. Thanks….

Answers

Kim Supercynski
Title: CFO
Company: Lincolnway Energy, LLC
(CFO, Lincolnway Energy, LLC) |

It sounds like you would treat it as a capital lease since you have a bargain purchase option and I would include all the support in the capital lease and not break out in sga.

Ken Bozzini
Title: CFO
Company: DaBoz & Associates
(CFO, DaBoz & Associates) |

I agree that on the credit side the entire amount is part of the capital lease accrual. In the past, on the debit side, the company has allocated part of the amount to prepaid support. Is an interesting question, but my gut thinks to capatilize the entire amount as a fixed asset. Thanks....

Andy Schneit
Title: Director of Plng & Reporting
Company: Consulting
(Director of Plng & Reporting, Consulting) |

This is a multi-element arrangement; support and asset need to be recognized as separate units of accounting. Entries should recognize (1) Fixed Asset - Computer, (2) Prepaid Expense, (3) S/T portion of Cap Lease and (4) L/T Cap Lease. Depreciate computer following the company's depreciation policy.

Determine the value of the prepaid support from vendor's price for stand-alone support. You may have to apply some judgment here.

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

If the support is combined with the asset...you may end up increasing (unintentionally) your property tax basis.

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