Entering Equipment Purchase with 100% financing

arnav03 · ‎March 05, 2022

Hello, I recently purchased a piece of equipment that is 100% financed for a 48 month term. My concern is how to allocate/separate the different portions of the loan (fees, taxes, interest, insurance, etc.) Also, the insurance for the equipment is rolled into the equipment loan. I know that I would have to create a fixed asset account for the equipment but I'm not sure if I include the taxes and fees paid in the value. I also would like to know how the interest portion of the insurance premium gets categorized. Is it part of the Insurance expense or should I separate the interest from the premium and allocate it under Interest expense? The dollar amounts of the loan are as follows:

Price of Equipment: $22,714.00

Down Payment: $0.00

Taxes: $1,412.84

Fees: $485.85

Amount financed: $24,612.69 (Price, taxes, & fees)

Interest paid on equipment loan after 48 months: $2,540.91

Total principal & interest paid after 48 months: $27,153.60

Insurance premium for the 48 month term (excluding the interest portion of the insurance): $1,192.00

Interest paid on the insurance premium after 48 months: $123.20

Total Insurance premium and interest after 48 months: $1,315.20

Rustler · ‎March 06, 2022

Yes create a fixed asset named for the equipment, and a fixed asset account for accumulated depreciation. And a liability account for the loan.

The interest paid on the whole loan is info, but not entered at the time of purchase. Interest will be entered with each payment as will the amount of insurance paid for at that time.

journal entry
fixed asset account, 23,199.85
Tax expense, 1,412.84
liability account, 24,612.69

View solution in original post

Rustler · ‎March 06, 2022

Yes create a fixed asset named for the equipment, and a fixed asset account for accumulated depreciation. And a liability account for the loan.

The interest paid on the whole loan is info, but not entered at the time of purchase. Interest will be entered with each payment as will the amount of insurance paid for at that time.

journal entry
fixed asset account, 23,199.85
Tax expense, 1,412.84
liability account, 24,612.69

arnav03 · ‎March 06, 2022

arnav03 · ‎March 06, 2022

Thanks Rustler! This helps a lot. One last thing, should I add the interest and insurance portions to the "general" insurance and interest accounts, or is it better to create sub-accounts specific to this loan to track these expenses?

Rainflurry · ‎March 06, 2022

@arnav03

Generally, sales tax is not an expense when purchasing a fixed asset. It should be included in the cost of the asset and depreciated as appropriate. If you're a sole proprietor, you may be able to deduct the sales tax on your personal return as part of your SALT deduction.

arnav03 · ‎March 06, 2022

Thanks Rainflurry! That's good to know.

Rustler · ‎March 07, 2022

I disagree with that statement, the cost of something is all costs paid, to include shipping, taxes, brokerage fees, etc.

Technically only inventory for resale can be purchased sales tax free, in the US anyway.

Rainflurry · ‎March 07, 2022

@Rustler

I think we're saying the same thing but your original post has sales tax expensed separately and not capitalized into to cost of the fixed asset.

TraceyOffgrid · ‎June 10, 2022

Can I jump in on this? Basically the same scenario, but I am debating whether or not I need to create a fixed asset for the equipment itself, and an intangible asset account for the other costs (taxes, fees, service contract) that are being financed. Depreciate the fixed and amortize the intangible. Would that be right, or is that only done on really big ticket dollar asset / loans? Thank you, Rustler! I've been seeing your posts as I've been searching this topic, and you are very helpful, and give very clear information. It is VERY MUCH appreciated!

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Entering Equipment Purchase with 100% financing