Capital Lease Buyout Journal Entry
A capital lease, also known as a finance lease, is a lease agreement where the lessee essentially gains ownership of the leased asset. When a capital lease buyout occurs, the lessee pays the remaining balance to gain full ownership of the asset.
Scenario: Capital Lease Buyout
Assume a company decides to buy out a piece of machinery under a capital lease. The remaining balance on the lease is ₹150,000, and the company pays this amount to complete the buyout.
Journal Entry for Capital Lease Buyout
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Lease Liability A/c | 150,000 | |
| To Cash/Bank A/c | | 150,000 |
| (Being payment made to buy out the capital lease) | | |
Additional Example:
Scenario: Recording the Buyout and Asset Transfer
Assume the company initially recorded the machinery under the capital lease at ₹500,000 with accumulated depreciation of ₹200,000.
Step 1: Record the Final Payment
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Lease Liability A/c | 150,000 | |
| To Cash/Bank A/c | | 150,000 |
| (Being final payment made for lease buyout) | | |
Step 2: Transfer the Asset to the Books
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Machinery A/c | 500,000 | |
| To Lease Liability A/c | | 500,000 |
| (Being the machinery recorded as an asset) | | |
Step 3: Record Accumulated Depreciation
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Accumulated Depreciation A/c | 200,000 | |
| To Depreciation Expense A/c | | 200,000 |
| (Being accumulated depreciation recorded) | | |
Detailed Example:
Example 1: Lease Buyout with Gain or Loss
Assume a company buys out a vehicle under a capital lease. The remaining lease liability is ₹100,000, but the fair value of the vehicle is ₹120,000. The company makes a payment of ₹100,000 to complete the buyout.
Step 1: Record the Payment
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Lease Liability A/c | 100,000 | |
| To Cash/Bank A/c | | 100,000 |
| (Being payment made for vehicle lease buyout) | | |
Step 2: Transfer the Vehicle to the Books
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Vehicle A/c | 120,000 | |
| To Gain on Lease Buyout A/c | | 20,000 |
| To Lease Liability A/c | | 100,000 |
| (Being vehicle recorded with gain on lease buyout) | | |
