Deal Pack Blog
Accounting for Operating Leases: Part 4- Accounting for Lease Repossession
It’s clear that leasing is growing as a business in the Buy Here-Pay Here (BHPH) industry, and with dealers jumping into leasing for the first time, it is essential to understand how to account for leasing activities on the books. With operating leases, lessees are contracted to use the asset, but the rights to the ownership of the vehicle remain with the dealership. Accounting for operating leases is commonly termed as “off balance sheet financing”. This is because operating leases do not result in any assets or liabilities recorded on the dealerships balance sheet.
As a result of this “off balance sheet financing”, the net effect on the income statement of the repossession of leased vehicle is drastically superior to that of an installment loan. Let’s look at a simplified example.
There’s an installment loan with a current principal balance of $10,000. The vehicle is repossessed, and valued at $2,000 (actual cash value or ACV). Assuming there is no outstanding fees or accumulated interest, $8,000 would be booked as a repossession loss at the time of repossession ($10,000 – $2,000). The entry would present as follows:
Using the same example for a lease, we can see that the income statement effect is much more favorable. With operating leases, the ‘contra asset’ account of unearned lease payments servers as a cushion against the removal of the receivable. Assuming there are no outstanding fees or adjusted depreciation expense, $0.00 would be booked as a repossession loss at the time of repossession. The only expense up to the point of repossession would be the amount recorded as depreciation. Assuming that the adjusted value of the leased unit is now at $6,000, the entry would present as follows:
|Unearned Lease Payments||10,000|
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