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Asset finance - raising finance on a fixed asset already bought and paid for in full

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  • # 119531

Hi all, could I ask for help on the following entries? This is more complex than the usual finance/loan entries that I am used to.

(Sorry for long post)

Asset bought and paid for in full by my client using own capital. *£72,200 plus VAT. This is entered into the ledgers.  VAT entered on VAT return but VR not yet submitted.
(*the original payment for asset was £300 plus vat less than the new invoice from finance company)
Client then wants to raise some money using asset to recoup some of the capital used to buy asset so:
Hire Purchase Finance using the asset:
New invoice raised from finance company (to client) for complete cost of asset £72,500 plus vat £14,500
New invoice raised by client (to finance company) for sale of (PART) of the asset for £43,500 plus VAT £8700

FINANCE AGREEMENT
Finance company pays loan money of  £43,500 into business account
Finance company agreement is deposit, from client, as £43,500 cash deposit (NB: not actually cash deposit as the collateral in the asset is being used as deposit so no cash leaves the business bank account)

I Don’t know how to enter a deposit that is not from bank, would I perhaps credit asset ledger £43,500, debit finance/loan ledger £43500?

Do I remove the original entry for the asset fully paid for (debit bank £87000, credit asset ledger £72200, credit VAT £14,440) and then re-enter the finance company’s invoice for £72,500 plus VAT £14,500?

I am unclear on the journal/ledger entries for most of this.  There is a VAT element too in which the £8700 VAT on the Sales Invoice raised by client is not paid.

It would seem that the asset is no longer owned by my client (I am waiting for client to confirm this) as £43500 is on HP finance and the remaining £43,500 is used as a deposit and to confuse me even more, there is still the VAT element in these figures of £14,500.

I would be deeply grateful for any help on this as my brain is now frazzled as I have been thinking about it non-stop for several days.

Thank you in advance.

  • Member PM.Dip
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  • # 119537

Hi,

If I understand this correctly, then your client is effectively purchasing the equipment on Hire Purchase, the difference from the norm being that he had purchased the equipment in the first place?

My understanding would be that he firstly invoices the finance company for the equipment which will be at £72500 plus VAT which will effectively remove the asset from his books, and cancel out the purchase invoice that you have already entered bar for the £300 he has "made" as profit on the transaction. At this point, the asset should no longer be on his books as he has effectively sold it for a small profit.

In my opinion, the client can't "Part own" the equipment with the finance company and the effect of raising an invoice from the client to the finance company for 43000 plus VAT is causing you to suffer the output VAT of £8700 thereon. 

I hope my limited input assists in some way.

Mark

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  • # 119538

banjo_mark said:

Hi,

If I understand this correctly, then your client is effectively purchasing the equipment on Hire Purchase, the difference from the norm being that he had purchased the equipment in the first place?

My understanding would be that he firstly invoices the finance company for the equipment which will be at £72500 plus VAT which will effectively remove the asset from his books, and cancel out the purchase invoice that you have already entered bar for the £300 he has "made" as profit on the transaction. At this point, the asset should no longer be on his books as he has effectively sold it for a small profit.

In my opinion, the client can't "Part own" the equipment with the finance company and the effect of raising an invoice from the client to the finance company for 43000 plus VAT is causing you to suffer the output VAT of £8700 thereon. 

I hope my limited input assists in some way.

Mark


 Hi Mark,

Thanks so much for your help. You have understood the situation and I do agree that it would be unlikely for him to be able to part own the equipment with the finance company.However, it is the finance company that has raised the invoice to my client for the equipment at £72,500 plus VAT, not the other way round. My client has raised the invoice to the finance company for £43,500 plus the vat of £8700 as you have stated. Then there is the deposit, to the finance company, on the machine. As it is not a cash deposit would I enter it as debit the finance/loan account and credit the asset account? It is quite complex but perhaps needn't be. I certainly think you are correct when you say that the asset should now be removed from my clients accounts entirely. My difficulty is working out the ledger entries required to make it "work".

Thanks again for taking the time to help me.

Kind regards,

Ruth

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