USA Capitalized Leases

[Brandi Martin]

Good Afternoon, We have a capitalized lease to record and need assistance with the entries for recording asset price and interest. The contract signed was for two projectors at zero percent interest for 36 months. The amount of the payments equal the purchase price of the asset. How do I calculate an imputed amount of interest or the cash price of the asset? Is this required or can the transaction be recorded without interest? Thanks, Brandi

 

[Steve-LevelUp]

If there really is 0% interest, then there is no need to record a made up interest rate. So long as the terms are commercially available (not a non-arms length transaction). So the entry would just.

Dr. Asset
Cr. Liability

Then, the payments would be.
Dr. Liability
Cr. Cash

As there is no interest on the agreement, then there is no interest expense to record.

 

[kirby]

Hi Brandi, imputed interest needs to be recorded and will be required by IRS rules on your tax return so you may as well do it right in your accounting books.
First you have to get an interest rate. That's easy as the IRS publishes the "Applicable Federal Rate" tables to be used for exactly this purpose. You would use the "Short Term" rate as your lease is 3 years. The July 2017 table shows an annual rate of 1.22% So now we have the rate. Next part is harder unless you have access to an interest rate calculator, like Tvalue or an Excel workbook set up to handle this. Problem to solve is - let's say your payments are $1,000 a month. So we know the term, we know the payment, we know the annual rate. You solve for the implicit loan amount. Answer is $35,331.53. Then software like Tvalue will show an amort schedule of how the $1,000 payment is to be split between principal and interest. If you have a qualified bookkeeper, CPA or tax person they should be able to do this for you in minutes.

 

[Drmdcpa]

You can also determine the interest buried in the transaction by amortizing the payments against fair market value of assets purchased. 0% interest is a marketing gimic.

Interest is required. No one lends money for three years for free.