Accounting For Purchase of Leased Asset
We will provide you here an illustration of the accounting for the purchase of a leased asset.
For various reasons and depending on the agreement between the lessor and the lessee, the lessee can actually purchase the asset under the finance lease.
Since it is a finance lease, the cost of the asset purchased is equal to the carrying amount of the leased asset plus the cash payment of the lessee, less the remaining balance of the lease liability.
Example Transaction – Accounting for Purchase of Leased Asset
Musk Corporation purchased the warehouse that it has been leasing under a finance lease for CU 3,000,000.
The current balance of certain accounts of Musk is as follows:
| Right of use asset | 6,000,000 |
| Accumulated depreciation | 3,500,000 |
| Lease liability | 3,900,000 |
Computation
| Right of use asset | 6,000,000 |
| Accumulated depreciation | 3,500,000 |
| Carrying amount | 2,500,000 |
| Cash payment | 3,000,000 |
| Total consideration | 5,500,000 |
| Lease liability | (3,900,000) |
| Cost of warehouse actually purchased | 1,600,000 |
Journal Entries
| Dr. Warehouse | 1,600,000 | |
| Dr. Accumulated depreciation | 3,500,000 | |
| Dr. Lease liability | 3,900,000 | |
| Cr. Right of use asset | 6,000,000 | |
| Cr. Cash | 3,000,000 |