USA Accounting for Purchase and Subsequent Rent-Back of Depreciable Assets

[mille605]

Hello, All!
I am trying to determine the proper way to account for the following scenarios in a new business:
Scenario 1:
a) We purchase several thousand depreciable assets off of a customer and determine a total "credit" or "discount" amount equal to the book value of all of the assets being purchased
b) We subsequently "rent" these assets back to the customer at a flat monthly rate per asset for the duration of the contract (essentially a subscription service)
c) The aforementioned "credit/discount" mentioned above is netted against the monthly rate to compensate the customer for the sale of the assets. This credit/discount is incurred over time. As an example, on a 10 year contract, the credit/discount amount is incurred monthly against the monthly rate over the course of the first 3 years of the contract until the total credit/discount amount is applied, then the remaining 7 years of the contract are unburdened)
d) As the purchased assets fully depreciate, these assets are replaced with new assets produced by our business (assuming the age of the assets purchased vary, so only a fraction will need to be replaced each month)
Question: How do we account for these assets when assuming ownership (and the subsequent replacements) and how do we account for the credit/discount (contra-revenue?, liability?, offsetting entries?)

Scenario 2:
a) A customer commits to a contract for the subscription service, but all assets must first be produced by our company since the customer does not currently own any of the assets.
b) The production of the assets will be booked as a capital expense and the revenue stream will remain the same monthly rate per asset (as mentioned in scenario 1). No credit/discount involved in this scenario, only consistent monthly revenue based on the total number of assets under contract.
Question: How will the Revenue Recognition work in this case if the majority of the cost is incurred up front (production and delivery) but the same monthly payments are received in perpetuity (assuming contract renewals)?

Any help would be greatly appreciated! I'm a relatively new CPA, so I need the assistance of the more experienced accounting geniuses out there!

Thank you!

 

[kirby]

Scenario 2 - acctg is just inventory acctg. For example, your company disburses cash to create inventory. Then inventory is rented (leased) to your customer. So follow lessor lease acctg gaap.

Scenario 1. I need more info on the "credit/discount to compensate the customer." Can you use $ in an example?

 

[mille605]

Hi Kirby. Thanks for your reply. As an example, there are 1000 assets that are being purchased from a customer. On average, they have a book value of $10 each, for a total credit/discount amount of $10,000. We will then rent the 1000 assets back to the customer for $1 per asset per month (Total monthly revenue of $1000). The credit/discount will be incurred against the revenue over the first 3 years of the contract for a monthly discount/credit of -$278 ($10,000/36 months). After these 36 months, the discount/credit will be satisfied and we will be netting the full $1000/month.

Will we be carrying this $10,000 as a liability on the balance sheet and reducing it by $278/month? If so, what would the credits be for these monthly entries? We will also be recording the depreciation on each of these purchased assets, as well as accounting for the new assets produced and delivered to replace the fully depreciated assets being rented.

 

[kirby]

Thanks, that clarified things.
You have two transactions to record. 1) The purchase of the assets for $10,000 as a long term note and 2) your lease of those assets back to the seller.
For (1) you record DR Equip purchased $10,000 and CR Notes Payable $10,000 then, if the note is interest bearing, each month for the next three years you will make a payment. So when you know the terms of the note you can create a schedule (if you have TVALUE use that) to show the acctg entries for principal and interest paid.
For (2) you will follow lessor acctg per ASC 840/FASB 13, which will direct the type of acctg entries you will make. ALSO BE SURE, you have a plan NOW for payment of property taxes and sales taxes, which depend on the state(or states) where the equipment is located. Hopefully, your agreement says the lessee is to pay for these.

 

[mille605]

Thanks, Kirby! I really appreciate your advice. So as we are reducing the note payable balance each month, we should credit cash? Even though there is no direct cash impact (since it is being paid as a discount to their subscription cost)

 

[kirby]

If you were paying cash for the note, you would pay them $278/ month. Instead the rent they pay you is $1,000 less $278 = $722 is what you will receive.
So for next three years
DR Cash $722
Dr Note Payable $278
CR Rental Revenue <$1,000>
Some auditor/bean counter will want to have this slightly adjusted for present value but I say let them figure that out. Gives them something to do.