Hi I am just having some trouble determining the finance lease postings. (UPDATED)
E.g. Asset PV £62,500 +VAT. The lease is from an asset finance company -the schedule shows fixed term rental agreement to my client. Value of payments is £70,847+VAT. At the end of the agreement the client can purchase it for a nominal value i.e £50.
So in the accounts, the asset is recognised as £62,500 and the associated liability of £62,500 (being the lower of the value and the payments due). Under FRS102, substantially all risks and rewards have transferred (even though ownership has not), the client is responsible for insuring the asset, it has the option to purchase at the end of the term for a nominal value and the pv of the "rental payments" are more than the fair value of the asset - would it not be then correct to capitalise the asset and associated liability?
My issue is with the "rent payments each month" so if say they are paying back £582.50+VAT in a month. How would we reduce down the liabilty and claim back the VAT. Would we calculate the effective rate of interest and include that as an interest charge for the period? If so how does the client then claim back the VAT on the monthly payments is it a claim on interest on repaying the liability?
Sorry - I am getting a little confused with this one. Can anyone be so kind as to assist - many thanks
Would it be as follows:
DR ASSET VALUE £ 62,500.00(NET) CR LIABILITY £ 62,500.00 / DR LIABILITY £582.50 DR VAT £116.50 CR BANK £ 699.00 / DR INTEREST £ 2,330.31 CR LIABILITY £ 2,330.31 (BEING EFFECITVE RATE OF INTEREST METHOD) = CLOSING LIABILITY £ 64,247.81