Client has presented me with a "Hire Agreement" for a new piece of machinery, which he happily had told me was a HP agreement in conversations prior to him providing his books and records to me. He had a bit of a shock when I told him it was not a HP agreement.
It's not HP. £9k "advance payment" ( which was funded by p/x of an old piece of machinery), followed by 36 monthly payments, then if they want to carry on using it ,one peppercorn annual payment.
Pretty sure this is a finance lease ( I've called the finance company to clarify who confirmed this).
Anyway, how do I work out the interest element of the payments? I have no copy of any invoice/paperwork that identifies how much said machinery actually cost.
Apologies if a stupid question, but scratching my head a little here.
Also, when this 36 month ends, the broker said it can be sold "with permission of the finance company" - I specifically asked him if my client wanted to keep and take full title of said piece of equipment would they have to pay any extra - he said "no they just sell it" - I tried to point out that when selling something there's usually a £ value involved - he got a bit vague and said it's just paperwork.
I'm a tad concerned as my client ( a lifelong friend) thinks he can just keep said machinery if he so wishes at no extra cost once term ends. I have my doubts.
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It's not too important
Use your best estimate of the asset value - that is what you capitalise and depreciate. The difference between that and the total primary rentals is your 'interest '. Whatever the split, you should get tax relief for the total payments made.
In accounting terms the difference between a finance lease and an HP agreement is rather subtle, and I can't think of any difference it makes to the numbers in the accounts, so I think you are over-dramatising.
I find it odd that an accountant would seek advice from a finance company on what the proper accounting treatment for the customer in one of their agreements is. Firstly it's none of their business and secondly what do they know about preparing accounts?
As Ruddles says you need to estimate the cash cost of the asset, and the rest is interest. But it should not be a complete stab in the dark. Surely the client knew what it would have cost to make a cash purchase of the asset when they entered into the finance agreement.
Regarding your questions about what happens after 36 months, you say yourself that the client has an option to purchase for a peppercorn payment. Then it will be his to sell, or continue to use as he sees fit. What is unclear about that?
You said you called the finance company to clarify whether it was a finance lease. "Finance lease" is an accounting term.
While calling the finance company
I might have asked them to send relevant paperwork to the client (your friend) so that the element of guesswork was reduced.