$1.00 Lease buy out

[Gretel]

My brain stopped and no experience to go back to. This is an accounting question.

Capital lease equipment FMV $10,500
Lease agreement with $1.00 buy out so loan amortization shows only 10,499 on balance sheet.

What do I do with the $1.00? Go to the dollar store? By the way, our dolloar has increased prices to $1.25.

[Snaggletooth]

Charge it off

My guess is that no one really cares about the $1.00 except you. You wouldn't care either except you are confronted with the question of what to do about it.

If you (or your client) have been charging principle via the discounted capital value and the remainder to interest, then take the dollar and charge it to interest too. Charging it to anything else (such as original capital value) will create problems in reconciling the fixed assets, depreciation, etc.

Good luck - Ron J.

[BOB W]

Loan

The debt should be the full amount- as the $1 buy back has not been paid yet.

[Unregistered]

The debt should be the full amount- as the $1 buy back has not been paid yet.

Agree...........

[BOB W]

[QUOTE=Gabriele]
Capital lease equipment FMV $10,500
Lease agreement with $1.00 buy out so loan amortization shows only 10,499 on balance sheet.


Since this is a $1 buyout, it is really a purchase-finance. Are you sure you have backed into the proper interest rate. While the FMV may be listed as $10,500 that may not be the backed into figure.

[Gretel]

Bob

Do you mean they could have used one FMV as actual FMV for equipment and another FMV as basis for loan? Is this common? I have would have thought that this is possible.

[BOB W]

Fmv

What I meant was, when you get a lease agreement that needs to be treated like a purchase-finance there are other items thrown into the pot that do not add up to FMV of the equipment only.

In a standard purchase-finance you get a bill of sale that shows the purchase price plus sales tax and a number of different "add-ons". The sales tax and add-ons add to the depreciable basis (cost) and the difference between total cost and the payments to be made is then interest.

Using FMV of the equipment alone shifts the interest deduction to a higher amount and decreases the depreciable basis.

Best Regards,

Bob

[BOB W]

Computation

If you give me the known variables of the lease, I will do the proper allocations and journal entries. Many times the lease is showing nothing more than the monthly lease payment and various assumptions need to be made, like interest at 9%, 12% or 15% or something like that.

[Gretel]

Bob

Thank you so much, Bob, for your explanations. Yes, you are right, the lease doesn't even show the FMV. My client had to call to find out. I would hate to have him call again and ask if anything was thrown in there.

What the lease also shows is a one time fee and that the first two payments had to made upfront. My amortization program accommodates a lot but not this one. Maybe I have to call the company because even if I assume the downpayment is all interest he still is paying too much. Something must be in there I don't know about.

[BOB W]

Leases.....

..... are always trouble because most clients do not know what they are paying for. All they know is the monthly payment and that they can afford it. Leases have a tendency to bury actual cost and most leases are more expensive than purchase/finance.

I try to tell my client to shop around as if it will be a purchase/finance. Then compare it to a lease payment.

The best way to approach this is to apply an interest rate that is logical and apply the balance to principle for depreciation purposes. Leases generally charge between 8% and 18 % and sometimes more. Depending on the application of the equipment there may or may not have been a sales tax paid (manufacturing and other resale type businesses).

Maybe you could call a retailer of this equipment and find out a current retail price. Maybe it is $10,500 and maybe it is not. Was there Sales Tax or not. If sales tax is envolved that will make the interest rate lower in comparison to the total lease payments.

Please tell me the lease payment, the term of the lease, and sales tax rate on this purchase.

[BOB W]

Jumping in to get 100 posts...

I also cheated to get 30 or 50 I forget.

[S T]

Congrats Senior Member

Bob W., I was curious why you were posting so many times regarding the $1 lease, altho I know you were trying to help Gabriele.

Congratulations on Senior Member status.

Sandy

[Gretel]

Congrats

from me too Mr. Senior. Hope you now act accordingly I cheated myself around the 100th post.

[BOB W]

Thanks ...............

............ for the congrats....whenever I cheat I always try to make up for it by being especially attentive to the board members so I can earn my status.

As many of you know I don't post that often and I never post on very technical tax matters as I am not as tax-wise as many on this board. But sometimes I play "cop" and jump in when I see a thread going astray or missing the point of the original poster. Kind of like this thread started by Gabriele. I hope this is OK with you board members.

[S T]

Jump In

I think it is wonderful that you jump in.

Sandy