we enter in to rental agreement with various customers for 36 months, where in we give our machines to customer and get monthly rent, and in our books we show the machinery in assets and claim depreciation. After 36 months the machinery will be retained by the customer at a cost of Rupee.1/- , as per the rental agreement ,
1.Are we doing right by taking the machinery in our assets
2.What will be accounting entry once the 36 months are over
This is a clear indication of Finance Lease.
At the time of the agreement, you are required to show as if you have sold the machine to the customer. Amount (instalments) paid by the customer will be shown as recovery against the value of machine and interest income over these 3 years. Of course, the depreciation is not available to you since the machine is assumed to have been sold to the customer.
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