Rent with Purchase Option

by Jason
(Charlottetown, PE, Canada)

Hi,

We have agreed to rent a piece of equipment with a purchase option, available for us to exercise anytime we see fit. The amount of the purchase option is equal to the original purchase price $48,000 less the amount of rent paid on the equipment.

After 16 months of renting, we decided to purchase the equipment.

How does the accounting for this work? Do I handle this the same way you handle a capital lease?

Hi Jason,

You didn't mention how you recorded the original lease ... as an operating lease or a capital lease.

This is generally what I think needs to happen under both scenarios.


Capital Lease
If you recorded it as a capital lease, the piece of equipment will be included on your balance sheet in the Leased Asset account ... at the original purchase price ... and a portion would have been amortized.

Upon purchase, you will need to transfer the asset to your Equipment account (should be under fixed assets on your balance sheet) as well as the associated amortization ... and clear the Lease Liability.


Operating Lease
If you recorded it as an operating lease, the piece of equipment will not be included on your balance sheet yet.

You will need to purchase the equipment at the amount still owing ... because you have already expensed the first 16 payments.





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