How do you treat interim rent on a equipment capital lease from an accounting view?

Question

We are paying interim rent on a equipment capital lease for about 4 months. We realize it is not efficient. Can we capitalize as a stand alone fixed asset outside of the lease agreement or should it be expensed as occurred? I cannot find any information in FAS 13 therefore please submit your source with the answer. Thanks.

It is a capital lease and is not part of the lease agreement of 36 months. It is actually extra rent payments until we start the 36 month term. Can the "extra" cost be capitalized or expensed?

Answer 1

You can use IAS 17 Leases as a guide. Leases are usually of 2 types - operating lease and capital (or finance) lease.

Operating lease rentals are written off to the income statement as and when incurred. You do not have title to the asset. You return the asset at the end of the lease period. Sometimes there is a purchase option at the end of this period, i.e. you pay an additional small amt and the equipment is yours. You then capitalise that small amt. as that amt has been calculated to reflect the worth of the asset by that time.

A capital lease is treated as an asset with payment by instalments. The corresponding credit entry is Lease Obligations a/c or Hire-purchase creditors depending on where you're from. Every time you pay an instalment you have to break it up into 2 parts - repayment of principal and an interest element.

You have to examine the contract you signed for this piece of equipment you've rented. Your a/cg has to reflect the legal form. If you signed an operating lease agreement and you wish to convert it to a capital lease, you have to meet up with the supplier and negotiate for a conversion and other terms and conditions.