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Lease Type? Capital or operating???

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#1
jon  
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769
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Location:
minnesota
Client opened a work out location and has two leases for the equipment one for three years and the other for four. There is a buyout that is worded Fair Market Value (10%) of the Owner's Original Cost (plus applicable taxes). They have said that the ownership stays with them>> Not a huge deal as first year of operations has a loss and leases run for four and three years so write-off of lease expense is plenty for a couple of years anyway. I have asked the client to request a statement from the lessor that says they(lessor) are the owner in all regards and are depreciating the equipment. Client seems to think some equipment can become obsolete, new/different equipment may be needed to buy and old can go. I think this is written so it is a big pain if you do not purchase - you return everything at your own expense. You cannot have two parties both depreciate the same equipment correct????
 

#2
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1159
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22-Apr-2014 1:34pm
Location:
North Carolina
Correct. For your client, if it is an operating lease, the lease payments are deducted. If it is a capital lease, the equipment is put on the books and depreciated, a Note Payable set up and reduced as payments are made.
 

#3
jon  
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769
Joined:
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Location:
minnesota
The question is will the vendor tell us how they are handling it? I think from our end the lease with maybe the 10% would make it a buy. In fact the two leases have probably 100 items combined and I am sure they would not want all items purchased so there will be negotiations on items toward the end. Including replacing items. I think I am leaning to operating lease, and hope for confirmation from lessor that is what to do based on how they are handling it.

The lease says that the ownership is with the lessor, but all incidents of ownership has been passed to my client. The insurance carried shows lessor as the beneficiary.

Thanks
 

#4
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608
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21-Apr-2014 7:09pm
Location:
NC
I don't think it matters to you what the lessor does on their books.
This sounds like a capital lease and should be depreciated. The VALUE you put on the books is the harder part which should be your PV of lease payments plus the PV of the 10 percent end payment BUT I would not have hesitated to treat this as capital and I don't care what the lessor does.
 


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