Thread: Buyout option in LT Debt

In the last year of a long term debt, such as capital lease, should the buyout option amount be included in current portion? Thanks!

The lessee pays a price that is not more than the FMV at the end of the lease. That price is not taken into consideration during the inception of the lease.

During the duration of the lease, lessee is depreciating the asset. This helps to ensure that at the end of the capital lease, the lessee will pay no more than a fair market value to gain full ownership of the product.

Originally Posted by catsunfish

Thanks, ZahiD. My case is one vehicle capital lease $20,000 with a buyout option of $500 in 2 years term. The initial entry I did was Dr. capital lease (asset) 20,000; Cr. LT Debt 20,000. Should I record as 19,500?

Assuming this is a financing lease (since it has a bargain purchase option - less than FMV), the value recorded is a product of cash paid, lease payments due and an implied interest rate.

Let me rephrase a little:
Cost will be invoice 20K plus other costs (sales tax).
Debt will be cost minus any downpayments minus any prepaid lease payments.

The interest charge of future monthly lease payments is a calculation where you solve for interest rate using the monthly lease payment, the number of payments not prepaid and the calculated debt as present value. Then compute an amortization schedule to allocate the remaining payments between interest and debt.

Your buyout option amount effects the interest rate calc above. I would calculate the 500 as a percent of the monthly payment and add that percent to the number of payments remaining, i.e. 22 $1,000 payments remain then i'd use 22.5 payments remaining.