Leased Equipment

[Maria]

Hi, this is not a tax question. I was visiting a client and found this interesting.

If the company leases out equipment under operating lease, does the company depreciates those equipment, which was inventory to them before. Since the leasee takes rent expense, the leasor takes depreciation? However, since it was inventory to the leasor, and I know you don't depreciate inventory, what is the entry for the leasor then? Thanks a lot.

[Bees Knees]

Inventory is something you sell to customers.

Equipment leased to customers is a depreciable asset. If it was inventory before, take it out of inventory and put it under fixed assets. Then start to depreciate it.

[Maria]

Accounting for Leases

Thanks. I just read my book. That is the answer. However, there is a financing company in between. The "leasor," our client, actually the supplier, leases/sells equipment to the financing company, so the financing company is the real leasor??? Our client receives a lump sum payment from the financing company, the leasee pays the financing company on a monthly basis. At the end of the lease term, the financing company returns the equipment back to our client, if the equipment has a value, for example, $1,000, the next lease equipment to the financing company, the payment received by our client is reduced by $1,000. Our client always records sales revenue, cost of goods sold, but not depreciation on those equipment, I guess it is correct?

[Bees Knees]

That’s how I see it. Your client is selling equipment to the financing company, who in turn does whatever they want with it. Then, your client agrees to buy the equipment back after so many years at a reduced price, thus allowing your client to re-sell it again.

[Maria]

Inventory is Reduced by $1,000

Thanks again. Our client is using an accounting software that is unique to the copier/fax sales/leasing business. At the end of the lease, the equipment "comes back" to the accounting system, if it has a value, for example, $1,000, sales and inventory is reduced by $1,000. I don't think it makes sense as to income tax, however, it makes sense that the next sales/lease to the financing company has to be reduced by $1,000 from the original price, that is how the system keeps track and it seems it happens automatically. I am not quite sure but will find out. Many people including sales, AR, AP, inventory personnel have hands on it and I'd find out how they affect the transactions.