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Accounting For Equipment Rental Agreement

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Up-to-date funds: Periodic payments under lease-to-sale contracts should be divided between the amount of interest (debit-in-kind account 695,000, interest charges) and the amount that represents the amount of the principal (G/L debit account 663900, rents activated). Plant Accounting regularly checks all payments from leasing contracts to ensure that everything is properly recorded. Rent is a financing agreement where the applicant pays an agreed rent to use the equipment without obligation to purchase. At the end of the agreement, one of the following may follow: Accounting after the fact: Rent/Interests Advice: You are looking for the remaining value of the lease 18 months after the start of the lease. It is advisable that you expand your lease table to have two separate «c/fwd» balances – the balance at the end of the fiscal year (March 31) and the balance at the end of the rental year (September 30). Rent/interest If you are looking at a lease, it should be relatively easy to see that the financing costs are related in the transaction. For example, a business could purchase a four-year economic asset for $10,000, or rent for four years and pay $3,000 a year in rent. If the leasing option is chosen, the company will have paid a total of $12,000 over four years for the use of the asset (3,000 PA x 4 years) – that is, the financing commission in this example is $2,000 (the difference between the total cost of the lease ($12,000) and the purchase price of the asset ($10,000). If a company pays rent, it actually makes a capital repayment (i.e. against the lease obligation) and an interest payment. The effects of these effects must be included in the financial statements in the form of financing costs in the profit and loss account and a reduction in the stock of liabilities on the balance sheet. In fact, there are many ways to do this, but the F7 reviewer has stated that he will only check the actuarial method. The actuarial method of accounting for a lease allocates interest to the period to which it actually relates, i.e.

the cost of financing is higher when the capital is the largest, but when the principal is repaid, the interest payments become lower (like a repayment mortgage that you might have on your property). To allocate interest to a fixed period, you need the interest rate implicit in the lease – here too, this is indicated in the review and you are not obliged to calculate it. Using a rental table is one of the simplest ways to apply the actuarial method to the test. Please note when the rent is actually due, is it in advance (i.e. the rent at the beginning of the rental year) or is it late (i.e. the rent at the end of the rental year)? This affects the completion of the rental table, as highlighted below: Advice: To be technically correct, the responsibility for leasing must be divided between a long-term responsibility and a current responsibility. Example 1 – Lease Delay Processing On April 1, 2009, Bush Co. entered into a machine lease agreement with an estimated lifespan of four years. The term of the lease is also four years and the asset is then returned to the leasing company. Annual rents of $5,000 are late as of March 31, 2010. The machine is expected to have zero residual value at the end of its life. The machine had a fair value of $14,275 at the beginning of the lease.

In calculating annual rents, the landlord includes a financing fee of 15% per year. How will the lease be recorded in Bush`s annual accounts for the March 31, 2010 fines? Solution The lease agreement should be considered a financing lease, given that the estimated life of the asset is four years and Bush retains the right to use the asset for four years in accordance with the lease and thus benefit from the benefits of the asset. For small businesses that do not have enough cash reserves to finance equipment leasing, there are several options they can follow to obtain rent or subventio