A/c entry of finance lease

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selim

Manager (Finance)

62 Points Posted on 25 October 2011

Dear Frinds,

Hope you all are well. Got a crtical scenario to solve with you.

My compnay purchased right of use of a OPTICAL FIBER CABLE for 15 years internationally. We have to pay monthly maintenance charge (inclusing insurance, repair, obsolence charge). No legal ownership or title will be transferred during the time. 15 years covers substantial lifetime part of the asset. There MAY BE a purchase option after 15 years.

Bank finance us for this purchase.

Now, we want to show it as Non-Current asset under no No FInance Lease method. (will trated like furniture purchase)

Could you please help me to way out for showing it as Non-Current Asset rather than leased asset.

If it is leased asset will Tax Authority allow my depreciation as admissible or they will disallow it or instead of depreciation Tax Authority will allow Rental value (similar amount to Dep)

Thank you in advance

Replies (2)

Akhil Sharma

Service

141 Points Posted on 25 October 2011

Dear Selim,

First of all you need to go thru the lease agreement you may be having for the use of optical fibar cable. In case it is a FINANCE LEASE, in that case only you will be able to capitalize the same as fixed assets. Usually in case of a finance lease the asset is transferred to the lessee at zero value at the end of lease period. If this is not the case then it is an operating lease and you need to charge the rent to P&L. However, if it is a finance lease, I am giving below the accounting entries below:

1) Capitalization of assets and creation of liability:

Dr. Fixed Assets

Cr. Supplier Account

(This capitalization is done at base value of assets)

2) Charging depreciation

Dr. Depreciation

Cr. Fixed Assets / Depreciation Reserve

3) payment of rentals

Dr. Supplier Account

Dr. Interest Account

Cr. Bank Account.

(rental amount to be broken into principle and interest based on the rate of interest charged as per the agreement. )