Discussion:1120S Equipment Lease/Sale
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Discussion Forum Index --> Accounting Questions --> 1120S Equipment Lease/Sale
| 8 March 2007 | |
| My client has been leasing a large piece of equipment for about $350 per month since April 2006. In November they "paid off" this lease for $18K. Additionally, first of 2007 they sold this equipment for $33K - at a profit. Is all they paid in 2006 classed as equipment rental on the 1120S? How is it converted to an asset and disposed of? I don't think depreciation can enter into it if it's rental expense but that seems not quite right either. Any ideas as to how to report and protect from gain on sale? | |
| March 8, 2007 | |
| Did you post this question elsewhere on this site? It sounds familiar.
Anyway, there are two types of leases. This one sounds like a capital lease which is in essence an agreement to purchase the equipment. The proper treatment is to set up the asset on the books at the start of the lease and record depreciation on it. A liability is also set up, and the "rental" payments are applied to it as well as interest expense. Since the lease started in 2006, you are still in a position to record it properly from the beginning. As far as gain on sale goes, it is what it is. Total basis = ($350 x 7) + $18,000 - depreciation. Sounds like they made a really good business decision and need to pay the tax on it. | |
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